As filed with the Securities and Exchange Commission on February 15, 1994
Registration No. 33-_____
- -----------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_______________________
FORM S-4
REGISTRATION STATEMENTUNDER
THE SECURITIES ACT OF 1933
_______________________
CRESTAR FINANCIAL CORPORATION
(Exact name of registrant as specified in its
charter)
Virginia 6711 54-0722175
(State or other (Primary Standard (I.R.S. Employer
jurisdiction Industrial Classification Identification No.)
of incorporation Code Number)
or organization)
919 East Main Street
P.O. Box 26665
Richmond, Virginia 23261-6665
(804) 782-5000
(Address, including zip code, and
telephone number, including
area code, of registrant's
principal executive offices)
JOHN C. CLARK, III
Corporate Senior Vice President, General
Counsel and Secretary
Crestar Financial Corporation
919 East Main Street
P.O. Box 26665
Richmond, Virginia 23261-6665
(804) 782-7445
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
Copies To:
LATHAN M. EWERS, JR. EDWARD L. LUBLIN
Hunton & Williams Manatt, Phelps & Phillips
951 E. Byrd Street 1200 New Hampshire Avenue,
N.W.
Riverfront Plaza, East Tower Washington, D. C. 20036
Richmond, Virginia 23219-4074 (202) 463-4314
(804) 788-8269
Approximate date of commencement of the proposed sale of the securities to the
public:
As soon as practicable after the Registration Statement becomes effective.
If the securities being registered on this form are being offered in
connection with the formation of a holding company and there is
compliance with General Instruction G, check the following box.
<TABLE>
CALCULATION OF REGISTRATION FEE
Title of Each Class of Maximum Amount Proposed Maximum Proposed Maximum Amount of
Securities To Be Registered To Be Registered Offering Price Per Aggregate Offering Registration
Unit Price Fee
<S> <C> <C> <C>
Common Stock, $5.00 par value 500,000 shares(1) $8.72(2) $10,508,631(2) $3,624
per share
Preferred Share Purchase 500,000 rights N/A N/A N/A
Rights(3)
</TABLE>
(1) This Registration Statement covers the maximum number of shares of
common stock of the Registrant which are
expected to be issued in connection with the transactions described herein.
(2) Estimated solely for purposes of calculating the registration fee in
accordance with Rule 457(f)(2) using the per share book value of
Annapolis Bancorp, Inc. common stock at September 30, 1993, and assuming no
cash will be paid by Registrant in the exchange.
(3) The Rights to purchase Participating Cumulative Preferred Stock, Series C
will be attached to and will trade withshares of the Common Stock of Crestar.
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file afurther amendment which specifically states that this
Registration Statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act of 1933, or until the Registration
Statement shall become effective on such date as the Commission, acting
pursuant to said Section 8(a), may determine.
CRESTAR FINANCIAL CORPORATION
CROSS-REFERENCE SHEET
Item of Form S-4 Location in Prospectus
1. Forepart of Facing Page; Cross Reference
Registration Statement Sheet; Outside Front Cover
and Outside Front Cover Page of Prospectus
Page of Prospectus
2. Inside Front and Inside Front Cover Page of
Outside Back Cover Prospectus; Table of Contents;
Pages of Prospectus Available Information;
Incorporation of Certain
Information by Reference
3. Risk Factors, Ratio of Summary; Comparative Per Share
Earnings to Fixed Data
Charges and Other
Information
4. Terms of the Summary; The Holding Company
Transaction Merger; Comparative Rights of
Shareholders; Annex I; Annex
II; Annex III
5. ProForma Financial Not Applicable
Information
6. Material Contracts with Not Applicable
the Company Being
Acquired
7. Additional Information Not Applicable
Required for Reoffering
by Persons and Parties
Deemed to be
Underwriters
8. Interests of Named Not Applicable
Experts and Counsel
9. Disclosure of Not Applicable
Commission's Position
on Indemnification for
Securities Act
Liabilities
10. Information with Available Information;
Respect to S-3 Incorporation of Certain
Registrants Information by Reference;
Summary
11. Incorporation of Incorporation of Certain
Certain Information by Information by Reference
Reference
12. Information with Not Applicable
Respect to S-2 or S-3
Registrants
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Item of Form S-4 Location in Prospectus
13. Incorporation of Not Applicable
Certain Information by
Reference
14. Information with Not Applicable
Respect to Registrants
Other than S-2 or S-3
Registrants
15. Information with Not Applicable
Respect to S-3
Companies
16. Information with Not Applicable
Respect to S-2 or S-3
Companies
17. Information with Summary; Supervision and
Respect to Companies Regulation; Business of AB;
other than S-2 or S-3 Market for and Dividends Paid
Companies on AB Common Stock; AB
Management's Discussion and
Analysis of Financial
Condition and Results of
Operations; Experts;
Consolidated Financial
Statements of AB
18. Information if Proxies, Incorporation of Certain
Consents or Information By Reference;
Authorizations are to Summary -- Shareholder
be Solicited Meeting; The Holding Company
Merger; The Holding Company
Merger -- Rights of
Shareholders Electing to
Exercise Their Right of
Appraisal; Annex III
19. Information if Proxies, Not Applicable
Consents or
Authorizations are not
to be Solicited, or in
an Exchange Offer
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[Annapolis Bancorp, Inc. Letterhead]
__________ __, 1994
Dear Shareholders:
You are cordially invited to attend a Special Meeting of
Shareholders of Annapolis Bancorp, Inc. ("AB") on April __, 1994
at ________ a.m., Eastern Time, at ________________________
_______________________________________________________________.
This is a very important meeting regarding your investment in AB.
The purpose of the meeting is to consider and vote upon the
Agreement and Plan of Reorganization, dated as of December 22,
1993, by and among AB, Annapolis Federal Savings Bank, Crestar
Financial Corporation ("Crestar") and Crestar Bank MD, and
related Plan of Merger (together, the "Agreement"), pursuant to
which, among other things, AB will be merged with and into
Crestar (the "Holding Company Merger"). In connection with the
Holding Company Merger, each share of common stock of AB
outstanding immediately prior to consummation of the Holding
Company Merger (other than shares held by Crestar or dissenters'
shares) will be converted into and represent the right to receive
shares of common stock of Crestar and/or, subject to certain
limitations, cash, as described in the accompanying Proxy
Statement/Prospectus. Your Board of Directors unanimously
recommends that you vote in favor of the Agreement and the
Holding Company Merger, which the Board believes is in the best
interests of the shareholders of AB.
Enclosed is a Notice of Special Meeting of Shareholders, a
Proxy Statement/Prospectus containing a discussion of the
Agreement and the Holding Company Merger and a proxy card.
Please complete, sign and date the enclosed proxy card and return
it as soon as possible in the envelope provided. If you decide
to attend the special meeting, you may vote your shares in person
whether or not you have previously submitted a proxy. It is
important to understand that the Agreement and Holding Company
Merger must be approved by the holders of more than 50% of all
outstanding shares of common stock of AB and that the failure to
vote will have the same effect as a vote against the proposal.
On behalf of the Board, thank you for your attention to this
important matter.
Very truly yours,
Gilbert L. Hardesty
President and Chief
Executive Officer
ANNAPOLIS BANCORP, INC.
147 Old Solomons Island Road
Annapolis, Maryland 21401
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
To Be Held __________ __, 1994
TO THE SHAREHOLDERS OF ANNAPOLIS BANCORP, INC.:
NOTICE IS HEREBY GIVEN that a special meeting of
shareholders has been called by the Board of Directors of
Annapolis Bancorp, Inc. ("AB") and will be held at
________________________________________________________, on
April __, 1994 at _____ _.m. for the purpose of considering and
voting upon the following matters:
1. Proposed Holding Company Merger. To consider and vote
upon the Agreement and Plan of Reorganization dated as of
December 22, 1993 (the "Agreement") and a related Holding Company
Plan of Merger providing for the merger of AB with and into
Crestar Financial Corporation (the "Holding Company Merger").
The Agreement is attached to the accompanying Proxy
Statement/Prospectus as Annex I.
2. Other Business. To consider and vote upon such other
matters as may properly come before the meeting.
Only those AB shareholders of record at the close of
business on ____________, 1994 shall be entitled to notice of and
to vote at the meeting. The affirmative vote of the holders of
more than 50% of the issued and outstanding shares of AB common
stock entitled to vote at the meeting is required to approve the
Holding Company Merger.
Pursuant to the Delaware General Corporation Law (the
"DGCL"), holders of AB common stock entitled to vote on approval
of the Agreement and the related Holding Company Plan of Merger
have the right to demand and receive payment of the fair value of
his or her shares of AB common stock, as to all but not less than
all, shares of AB common stock beneficially owned by him, and, if
the Holding Company Merger is consummated, to receive cash from
Crestar Financial Corporation equal to the fair value of such
shares determined as of immediately prior to the Holding Company
Merger. Any holder who elects to perfect his right of appraisal
and demands payment of the fair value of his shares of AB common
stock must strictly comply with Section 262 of the DGCL, a copy
of which is attached to the accompanying Proxy
Statement/Prospectus as Annex IV and a summary of such provisions
is set forth in the accompanying Proxy Statement/Prospectus under
"The Holding Company Merger -- Rights of Shareholders Electing to
Exercise Their Right of Appraisal." To perfect the right of an
appraisal, the shareholder must not vote for the Holding Company
Merger or even return an executed proxy that is otherwise left
blank.
By Order of the Board of Directors,
Corporate Secretary
___________ __, 1994
Annapolis, Maryland
THE BOARD OF DIRECTORS OF AB UNANIMOUSLY RECOMMENDS THAT THE
HOLDERS OF AB COMMON STOCK VOTE TO APPROVE THE MERGER PROPOSAL.
IT IS IMPORTANT THAT YOUR SHARES BE REPRESENTED AT THE MEETING.
PLEASE SIGN, DATE AND RETURN THE ENCLOSED PROXY CARD IN THE
ACCOMPANYING POSTAGE-PAID ENVELOPE SO THAT YOUR SHARES WILL BE
REPRESENTED AT THE MEETING. SHAREHOLDERS ATTENDING THE MEETING
MAY PERSONALLY VOTE ON ALL MATTERS WHICH ARE CONSIDERED, IN WHICH
EVENT THE SIGNED PROXIES ARE REVOKED.
PROXY STATEMENT
FOR
SPECIAL MEETING OF SHAREHOLDERS
OF
ANNAPOLIS BANCORP, INC.
To Be Held On April __, 1994
_______________
PROSPECTUS OF
CRESTAR FINANCIAL CORPORATION
Common Stock
par value $5.00
_______________
This Proxy Statement/Prospectus is being furnished to the
holders of common stock, par value $1.00 per share (the "AB
Common Stock"), of Annapolis Bancorp, Inc., a Delaware
corporation ("AB"), in connection with the solicitation of
proxies by the AB Board of Directors (the "AB Board") for use at
a special meeting of AB shareholders to be held at _:__ _.m. on
April __, 1994, at _________________, __________________,
_________, ________ (the "AB Shareholder Meeting").
At the AB Shareholder Meeting, the shareholders of record of
AB Common Stock as of the close of business on _____ __, 1994,
will consider and vote upon a proposal to approve the Agreement
and Plan of Reorganization (the "Agreement"), dated as of
December 22, 1993, by and among Crestar Financial Corporation
("Crestar"), Crestar Bank MD, a Maryland banking corporation
wholly owned by Crestar ("Crestar Bank MD"), AB, and Annapolis
Federal Savings Bank, a federally chartered stock savings bank
wholly owned by AB ("Annapolis"), pursuant to which, among other
things, AB will merge with and into Crestar (the "Holding Company
Merger"), and thereafter Annapolis will merge directly or
indirectly with and into Crestar Bank MD (the "Bank Merger") (the
Holding Company Merger and the Bank Merger are sometimes referred
to together as the "Transaction"). Upon consummation of the
Holding Company Merger, which is expected to occur in mid- to
late May 1994, each outstanding share of AB Common Stock (other
than shares as to which the holder exercises the right to an
appraisal ("Dissenting Shares") and other than shares held by
Crestar) shall be converted into and represent the right to
receive (upon a shareholder's election) either (i) $12.75 in cash
(the "Merger Consideration") (provided that the number of shares
of AB Common Stock for which shareholders elect to receive cash,
when added to the number of Dissenting Shares, shall not exceed
30% of the outstanding shares of AB Common Stock) or (ii) a
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number of shares of Crestar Common Stock, determined by dividing
the Merger Consideration by the average closing price of Crestar
Common Stock (the "Average Closing Price") as reported on the New
York Stock Exchange ("NYSE") for each of the 20 trading days
ending on the third day prior to the Closing Date (as defined in
the Agreement) (the "Exchange Ratio"), subject to adjustment as
set forth in the Agreement. Based on the closing price of
Crestar Common Stock on the NYSE on February 3, 1994 of $42.875,
each share of AB Common Stock would have been exchanged for .297
shares of Crestar Common Stock. Such number of shares of Crestar
Common Stock may increase or decrease depending on the Average
Closing Price as described herein. See "The Holding Company
Merger -- Determination of Exchange Ratio and Exchange for
Crestar Common Stock." For a description of the Agreement, which
is included herein in its entirety as Annex I to this Proxy
Statement/Prospectus, see "The Holding Company Merger."
_______________
This Proxy Statement/Prospectus and the accompanying proxy
appointment cards are first being mailed to shareholders of AB on
or about _______ __, 1994.
_______________
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION, NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY
STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROXY STATEMENT/PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
_______________
The date of this Proxy Statement/Prospectus is ________ __, 1994.
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No person has been authorized to give any information or to
make any representation other than as contained herein in
connection with the offer contained in this Proxy
Statement/Prospectus, and if given or made, such information or
representation must not be relied upon. This Proxy
Statement/Prospectus does not constitute an offer to sell or a
solicitation of an offer to buy any securities other than the
securities to which it relates, nor does it constitute an offer
to or solicitation of any person in any jurisdiction to whom it
would be unlawful to make such an offer or solicitation. The
delivery of this Proxy Statement/Prospectus at any time does not
imply that the information herein is correct as of any time
subsequent to the date hereof.
-3-
TABLE OF CONTENTS
Page
AVAILABLE INFORMATION . . . . . . . . . . . . . . . . . . . . 1
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE . . . . . . 1
SUMMARY . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Parties to the Transaction . . . . . . . . . . . . . . . 3
Shareholder Meeting . . . . . . . . . . . . . . . . . . 4
Vote Required; Record Date . . . . . . . . . . . . . . . 4
The Holding Company Merger . . . . . . . . . . . . . . . 4
The Exchange Ratio . . . . . . . . . . . . . . . . . . . 5
Cash Election . . . . . . . . . . . . . . . . . . . . . 5
Effective Time . . . . . . . . . . . . . . . . . . . . . 5
Rights of Shareholders Electing to Exercise Their Right
of Appraisal . . . . . . . . . . . . . . . . . . . 6
Opinion of Financial Advisor . . . . . . . . . . . . . . 6
Conditions to Consummation . . . . . . . . . . . . . . . 6
FNB Loan . . . . . . . . . . . . . . . . . . . . . . . . 7
Conduct of Business Pending the Holding Company Merger . 7
Interests of Certain Persons in the Holding Company
Merger . . . . . . . . . . . . . . . . . . . . . . 7
Resale of Crestar Common Stock . . . . . . . . . . . . . 7
Certain Federal Income Tax Consequences of the
Transaction . . . . . . . . . . . . . . . . . . . . 7
Stock Option Agreement . . . . . . . . . . . . . . . . . 8
Market Prices Prior to Announcement of the Transaction . 8
Comparative Per Share Data . . . . . . . . . . . . . . . 9
Selected Financial Data . . . . . . . . . . . . . . . . 11
GENERAL INFORMATION . . . . . . . . . . . . . . . . . . . . . 15
CRESTAR RECENT FINANCIAL RESULTS . . . . . . . . . . . . . . 17
THE HOLDING COMPANY MERGER . . . . . . . . . . . . . . . . . 18
Background of the Holding Company Merger . . . . . . . . 18
Reasons and Basis for the Holding Company Merger . . . . 19
Opinion of Financial Advisor . . . . . . . . . . . . . . 20
Effective Time of the Holding Company Merger . . . . . . 26
Determination of Exchange Ratio and Exchange for
Crestar Common Stock . . . . . . . . . . . . . . . 26
Cash Election; Election Procedures . . . . . . . . . . . 27
Business of AB Pending the Holding Company Merger . . . 28
FNB Loan . . . . . . . . . . . . . . . . . . . . . . . . 29
Conditions to Consummation of the Holding Company
Merger . . . . . . . . . . . . . . . . . . . . . . 30
Stock Option Agreement . . . . . . . . . . . . . . . . . 31
Termination . . . . . . . . . . . . . . . . . . . . . . 32
Accounting Treatment . . . . . . . . . . . . . . . . . . 33
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Operations After the Holding Company Merger . . . . . . 33
Interest of Certain Persons in the Transaction . . . . . 34
Effect on AB Employee Benefits Plans . . . . . . . . . . 36
Certain Federal Income Tax Consequences . . . . . . . . 37
Rights of Shareholders Electing to Exercise Their Right
of Appraisal . . . . . . . . . . . . . . . . . . . 42
BUSINESS OF CRESTAR . . . . . . . . . . . . . . . . . . . . . 42
BUSINESS OF AB . . . . . . . . . . . . . . . . . . . . . . . 44
AB MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS . . . . . . . . 70
MARKET FOR AND DIVIDENDS PAID ON AB COMMON STOCK . . . . . . 79
AB SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS . . . . . 80
SUPERVISION AND REGULATION OF CRESTAR . . . . . . . . . . . . 80
Limits on Dividends and Other Payments . . . . . . . . . 80
Capital Requirements . . . . . . . . . . . . . . . . . . 82
Cross-Guarantee . . . . . . . . . . . . . . . . . . . . 83
Bank Holding Companies . . . . . . . . . . . . . . . . 84
Banks . . . . . . . . . . . . . . . . . . . . . . . . . 84
FDIC Insurance Assessments . . . . . . . . . . . . . . . 85
Governmental Policies . . . . . . . . . . . . . . . . . 85
DESCRIPTION OF CRESTAR CAPITAL STOCK . . . . . . . . . . . . 85
Common Stock . . . . . . . . . . . . . . . . . . . . . . 86
Preferred Stock . . . . . . . . . . . . . . . . . . . . 86
Rights . . . . . . . . . . . . . . . . . . . . . . . . . 87
Virginia Stock Corporation Act . . . . . . . . . . . . . 88
COMPARATIVE RIGHTS OF SHAREHOLDERS . . . . . . . . . . . . . 89
Capitalization . . . . . . . . . . . . . . . . . . . . . 89
Amendment of Articles or Bylaws . . . . . . . . . . . . 90
Required Shareholder Vote for Certain Actions . . . . . 90
Director Nominations . . . . . . . . . . . . . . . . . . 91
Directors and Classes of Directors; Vacancies and
Removal of Directors . . . . . . . . . . . . . . . 92
Anti-Takeover Provisions . . . . . . . . . . . . . . . . 93
Preemptive Rights . . . . . . . . . . . . . . . . . . . 94
Assessment . . . . . . . . . . . . . . . . . . . . . . . 95
Conversion; Redemption; Sinking Fund . . . . . . . . . . 95
Liquidation Rights . . . . . . . . . . . . . . . . . . . 95
Dividends and Other Distributions . . . . . . . . . . . 95
Special Meetings of Shareholders . . . . . . . . . . . . 96
Indemnification . . . . . . . . . . . . . . . . . . . . 96
Shareholder Proposals . . . . . . . . . . . . . . . . . 97
Shareholder Inspection Rights; Shareholder Lists . . . . 97
Shareholder Rights Plan . . . . . . . . . . . . . . . . 98
Dissenters' Rights . . . . . . . . . . . . . . . . . . . 98
-ii-
RESALE OF CRESTAR COMMON STOCK . . . . . . . . . . . . . . . 99
EXPERTS . . . . . . . . . . . . . . . . . . . . . . . . . . . 99
LEGAL OPINION . . . . . . . . . . . . . . . . . . . . . . . . 99
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS OF
AB AND ANNAPOLIS . . . . . . . . . . . . . . . . . . . . F-1
ANNEX I -- Agreement and Plan of Reorganization
ANNEX II -- Stock Option Agreement
ANNEX III -- Fairness Opinion of Kaplan Associates, Inc.
ANNEX IV -- Section 262 of the Delaware General Corporation
Law
-iii-
AVAILABLE INFORMATION
Crestar is subject to the reporting and informational
requirements of the Securities Exchange Act of 1934 (the
"Exchange Act") and in accordance therewith files reports, proxy
statements and other information with the Securities and Exchange
Commission (the "SEC"). Reports, proxy statements and other
information filed with the SEC can be inspected and copied at the
public reference facilities maintained by the SEC at Room 1024,
450 Fifth Street, N.W., Washington, D.C. 20549, and at the
Regional Offices located at Northwestern Atrium Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60611-2511 and
Seven World Trade Center (13th Floor), New York, New York 10048.
Copies of such material can be obtained from the Public Reference
Section of the SEC at 450 Fifth Street, N.W., Washington, D.C.
20549, at prescribed rates. Such reports, proxy statements and
other information also may be inspected at the offices of the New
York Stock Exchange, 20 Broad Street, New York, New York 10005.
As permitted by the Rules and Regulations of the SEC, this Proxy
Statement/Prospectus does not contain all the information set
forth in the Registration Statement on Form S-4, of which this
Proxy Statement/Prospectus is a part, and exhibits thereto
(together with the amendments thereto, the "Registration
Statement"), which has been filed by Crestar with the SEC under
the Securities Act of 1933 (the "1933 Act") with respect to
Crestar Common Stock and to which reference is hereby made.
THIS PROXY STATEMENT/PROSPECTUS INCORPORATES BY REFERENCE
CERTAIN DOCUMENTS RELATING TO CRESTAR THAT ARE NOT PRESENTED
HEREIN OR DELIVERED HEREWITH. CRESTAR DOCUMENTS ARE AVAILABLE
WITHOUT CHARGE UPON REQUEST FROM CRESTAR'S INVESTOR RELATIONS
DEPARTMENT, CRESTAR FINANCIAL CORPORATION, 919 EAST MAIN STREET,
RICHMOND, VIRGINIA 23261-6665, (804) 782-7152. IN ORDER TO
ENSURE TIMELY DELIVERY OF THE DOCUMENTS, ANY REQUESTS SHOULD BE
MADE BY _________ __, 1994 [five business days before
Shareholders' meeting].
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
The following documents filed by Crestar are incorporated by
reference in this Proxy Statement/Prospectus: (i) Crestar's
Annual Report on Form 10-K for the year ended December 31, 1992;
(ii) Crestar's Quarterly Reports on Form 10-Q for the periods
ended March 31, 1993, June 30, 1993 and September 30, 1993; (iii)
the description of Crestar Common Stock in Crestar's registration
statement filed under the Exchange Act with respect to Crestar
Common Stock, including all amendments and reports filed for the
purpose of updating such description; and (iv) Crestar's Current
Report on Form 8-K, dated March 5, 1993.
-1-
All documents filed by Crestar pursuant to Sections 13(a),
13(c), 14 or 15(d) of the Exchange Act subsequent to the date
hereof and prior to the date of the AB Shareholder Meeting are
hereby incorporated by reference in this Proxy
Statement/Prospectus and shall be deemed a part hereof from the
date of filing of such documents. Any statement contained in any
supplement hereto or in a document incorporated or deemed to be
incorporated by reference herein shall be deemed to be modified
or superseded for purposes of this Proxy Statement/Prospectus to
the extent that a statement contained herein, in any supplement
hereto or in any subsequently filed document which also is or is
deemed to be incorporated by reference herein modifies or
supersedes such statement. Any such statement so modified or
superseded shall not be deemed, except as so modified or
superseded, to constitute a part of this Proxy
Statement/Prospectus or any supplement hereto.
Also incorporated by reference herein is the Agreement and
Plan of Reorganization among Crestar, Crestar Bank MD, AB and
Annapolis, which is attached to this Proxy Statement/Prospectus
as Annex I.
-2-
SUMMARY
The following summary is not intended to be a complete
description of all material facts regarding Crestar, AB and the
matters to be considered at the AB Shareholder Meeting and is
qualified in all respects by the information appearing elsewhere
or incorporated by reference in this Proxy Statement/Prospectus,
the Annexes hereto and the documents referred to herein.
Parties to the Transaction
Crestar. Crestar is the holding company for Crestar Bank of
Virginia, Crestar Bank N.A. of Washington, D.C. and Crestar Bank
MD of Maryland. At December 31, 1993, Crestar had approximately
$13.3 billion in total assets, $10.2 billion in total deposits
and $1.1 billion in total shareholders' equity.
In 1963, six Virginia banks, whose predecessors had been in
existence since the early 1800s, combined to form Crestar, a bank
holding company formed under the Bank Holding Company Act of
1956, and Crestar Bank of Virginia. Crestar acquired Crestar
Bank N.A. on December 27, 1985 and Crestar Bank MD on April 1,
1986.
Crestar serves customers through a network of 302 banking
offices and 254 automated teller machines (as of December 31,
1993). Crestar offers a broad range of banking services,
including various types of deposit accounts and instruments,
commercial and consumer loans, trust and investment management
services, bank credit cards and international banking services.
Crestar's subsidiary, Crestar Insurance Agency, Inc., offers a
variety of personal and business insurance products. Securities
brokerage and investment banking services are offered by
Crestar's subsidiary, Crestar Securities Corporation. Mortgage
loan origination, servicing and wholesale lending are offered by
Crestar Mortgage Corporation, and investment advisory services
are offered by Capitoline Investment Services Incorporated, both
of which are subsidiaries of Crestar Bank of Virginia. These
various Crestar subsidiaries provide banking and non-banking
services throughout Virginia, Maryland and Washington, D.C., as
well as certain non-banking services to customers in other
states.
The executive offices of Crestar are located in Richmond,
Virginia at Crestar Center, 919 East Main Street. Regional
headquarters are located in Norfolk and Roanoke, Virginia and in
Washington, D.C. Crestar's Operations Center is located in
Richmond.
AB. AB is a unitary savings and loan holding company
incorporated under the laws of the State of Delaware on August 6,
1986. AB's principal business is conducted through its wholly-
-3-
owned subsidiary, Annapolis. AB and Annapolis are subject to
regulation by the Office of Thrift Supervision ("OTS") as well as
certain regulatory reporting requirements.
Annapolis (formerly Annapolis Federal Savings and Loan
Association) was formed as a federally chartered mutual savings
and loan association in 1925, and subsequently converted to a
federally chartered stock savings bank upon its conversion to
stock ownership effective December 31, 1986.
Shareholder Meeting
The AB Shareholder Meeting will be held on __________ __,
1994 at _:__ _.m., at _________________, __________________,
_________, ________, for the purpose of considering and voting
upon a proposal to approve the Agreement and a related Holding
Company Plan of Merger.
Vote Required; Record Date
Only AB shareholders of record at the close of business on
_______ __, 1994 (the "Record Date") will be entitled to vote at
the AB Shareholder Meeting. The affirmative vote of the holders
of more than 50% of the shares outstanding on such date is
required to approve the Holding Company Merger. As of the Record
Date, there were 1,206,500 shares of AB Common Stock entitled to
be voted, held by approximately 60 shareholders of record.
The directors of AB and their affiliates beneficially owned,
as of the Record Date, 917,156 shares or approximately 76.02% of
the 1,206,500 outstanding shares of AB Common Stock (which
excludes 4,000 shares which may be acquired through the exercise
of an option granted by AB to an officer).
The Board of Directors of Crestar has approved the Holding
Company Merger and approval of the Holding Company Merger by
Crestar shareholders is not required by the Virginia Stock
Corporation Act ("VSCA").
The Holding Company Merger
Pursuant to the Agreement, at the Effective Time of the
Holding Company Merger, AB will merge into Crestar in accordance
with the Holding Company Plan of Merger whereby the separate
existence of AB will cease. At the Effective Time of the Holding
Company Merger, each outstanding share of AB Common Stock (other
than shares held by Crestar or Dissenting Shares) shall be
converted into and represent the right to receive (upon a
shareholder's election) either (i) $12.75 in cash (provided that
the number of shareholders of AB Common Stock that elect to
receive cash, when added to the Dissenting Shares, shall not
exceed 30% of the outstanding shares of AB Common Stock) or
-4-
(ii) a number of shares of Crestar Common Stock, determined by
the Exchange Ratio, subject to adjustment as set forth in the
Agreement.
Immediately following the Effective Time of the Holding
Company Merger, Annapolis will merge directly or indirectly into
Crestar Bank MD in accordance with the Bank Plan of Merger, and
the separate existence of Annapolis will cease. The Bank Merger
is intended to qualify as an "Oakar" transaction to avoid the
payment of Federal Deposit Insurance Corporation ("FDIC") exit
and entrance fees in accordance with Section 5(d)(3) of the
Federal Deposit Insurance Act ("FDIA").
The Exchange Ratio
For the purpose of determining the Exchange Ratio, each
share of AB Common Stock has been valued at $12.75 (the "Merger
Consideration"). The number of shares of Crestar Common Stock to
be delivered for each share of AB Common Stock will be determined
by dividing $12.75 by the average closing price of Crestar Common
Stock as reported on the NYSE for each of the 20 trading days
prior to the third day prior to the Closing Date (as defined in
the Agreement). The Exchange Ratio would be appropriately
adjusted in the event of any distribution (other than cash
dividends) with respect to Crestar Common Stock which occurs
prior to the effective date of the Transaction.
Cash Election
Before or promptly after the Effective Time of the Holding
Company Merger, AB shareholders will be mailed a cash option
form, letter of transmittal and other transmittal materials (the
"Election Form"). The Election Form will permit a holder of
shares of AB Common Stock to elect to receive all or any part of
their shares for $12.75 cash per share of AB Common Stock.
Because the number of shares exchanged for cash, when added to
Dissenting Shares, may not exceed 30% of the outstanding shares
of AB Common Stock, the extent to which the cash elections will
be accommodated will depend upon the number of AB shareholders
who elect to receive cash. Accordingly, an AB shareholder who
elects to receive cash may instead receive shares of Crestar
Common Stock (plus cash in lieu of fractional shares). See "The
Holding Company Merger -- Cash Election; Election Procedures."
Effective Time
The Transaction is expected to be consummated in mid- to
late May 1994. AB and Crestar each has the right, acting
unilaterally, to terminate the Agreement should the Transaction
not be consummated by September 30, 1994. Crestar has the right
to terminate the Agreement if the holders of more than 15% of the
outstanding shares of AB Common Stock exercise dissenters' rights
-5-
in connection with the Holding Company Merger. See "The Holding
Company Merger -- Termination."
Rights of Shareholders Electing to Exercise Their Right of
Appraisal
Holders of AB Common Stock entitled to vote on approval of
the Agreement and the related Holding Company Plan of Merger have
the right to demand and receive payment of the fair value of each
such holder's shares of AB Common Stock in accordance with
Section 262 of the DGCL. The procedures to be followed by
shareholders electing to perfect his right of appraisal are
summarized under "The Holding Company Merger -- Rights of
Shareholders Electing to Exercise Their Right of Appraisal" and a
copy of the applicable provisions of the DGCL is set forth in
Annex IV to this Proxy Statement/Prospectus. Failure to follow
such provisions precisely may result in loss of such appraisal
rights.
Opinion of Financial Advisor
AB has received the opinion of Kaplan Associates, Inc.
("Kaplan") that the Merger Consideration to be received by the
holders of AB Common Stock pursuant to the terms of the Holding
Company Merger is fair to the AB shareholders from a financial
point of view. Kaplan's opinion is directed only to the Merger
Consideration and does not constitute a recommendation to any
holders of AB Common Stock as to how such holders of AB Common
Stock should vote at the AB Shareholder Meeting or as to any
other matter. For additional information concerning Kaplan and
its opinion, see "The Holding Company Merger -- Opinion of
Financial Advisor" and the opinion of such firm attached as
Annex III to this Proxy Statement/Prospectus.
Conditions to Consummation
Consummation of the Holding Company Merger would be
accomplished by the statutory merger of AB into Crestar and
consummation of the Bank Merger would be accomplished by the
statutory merger of Annapolis into Crestar Bank MD. The Holding
Company Merger and the Bank Merger are contingent upon the
approvals of the Board of Governors of the Federal Reserve System
(the "Federal Reserve Board"), the OTS and the Maryland State
Bank Commissioner, Department of Licensing and Supervision
("Maryland Bank Commissioner"), which approvals have been applied
for and are expected to be received. The Transaction is also
subject to other usual conditions, including receipt by Crestar
and AB of the legal opinion of Hunton & Williams that the Holding
Company Merger and the Bank Merger each will constitute a tax-
free reorganization under Section 368(a) of the Internal Revenue
Code (the "Code"). See "The Holding Company Merger -- Conditions
to Consummation of the Holding Company Merger."
-6-
FNB Loan
Crestar has agreed that it will extend a loan in an amount
of approximately $7.3 million to AB to enable AB to prepay in
full its FNB Loan (as hereinafter defined) on or before the
Closing Date, or June 30, 1994, whichever date is earlier.
Alternatively, AB shall have received the written consent of
First National Bank of Maryland ("FNB") within 30 days before the
Closing Date for the parties to consummate the transactions
contemplated under the Agreement. See "Business of AB -- FNB
Loan".
Conduct of Business Pending the Holding Company Merger
Pursuant to the terms of the Agreement, AB has agreed not to
take certain actions relating to the operation of its business
pending consummation of the Holding Company Merger without the
prior approval of Crestar, except as otherwise permitted by the
Agreement. See "The Holding Company Merger -- Business of AB
Pending the Holding Company Merger."
Interests of Certain Persons in the Holding Company Merger
Certain members of AB's management and the AB Board have
interests in the Holding Company Merger in addition to their
interests as shareholders of AB generally. These include, among
other things, provisions in the Agreement relating to
indemnification and eligibility for certain Crestar employee
benefits and provisions in other proposed agreements between
Crestar and certain of AB's directors, officers or employees
relating to employment terms, directors' fees and bonuses. See
"The Holding Company Merger -- Interest of Certain Persons in the
Transaction."
Resale of Crestar Common Stock
Shares of Crestar Common Stock received in the Holding
Company Merger will be freely transferable by the holders
thereof, except for those shares held by those holders who may be
deemed to be "affiliates" (generally including directors, certain
executive officers and ten percent or more shareholders) of AB or
Crestar under applicable federal securities laws. See "Resale of
Crestar Common Stock."
Certain Federal Income Tax Consequences of the Transaction
Each of the Holding Company Merger and the Bank Merger is
intended to be a tax-free "reorganization" as defined in
Section 368(a) of the Code, but the receipt of cash by an AB
shareholder for any shares of AB Common Stock or in lieu of a
fractional share of Crestar Common Stock will be a taxable
transaction. A condition to consummation of the Holding Company
-7-
Merger is the receipt by Crestar and AB of an opinion from
Hunton & Williams, counsel to Crestar, as to the qualification of
the Holding Company Merger as a tax-free reorganization and
certain other federal income tax consequences of the Transaction.
See "The Holding Company Merger -- Certain Federal Income Tax
Consequences."
Stock Option Agreement
Pursuant to a Stock Option Agreement, dated as of
November 16, 1993 (the "Stock Option Agreement"), AB has granted
Crestar an option to purchase up to 240,000 shares of AB Common
Stock at $10.00 per share exercisable upon the occurrence of a
Purchase Event (as hereinafter defined). The Stock Option
Agreement terminates in accordance with its terms on the date on
which occurs the earliest of: (i) the Effective Time of the
Holding Company Merger; (ii) a termination of the Agreement in
accordance with its terms (other than by Crestar under certain
circumstances) prior to the occurrence of a Purchase Event or a
Preliminary Purchase Event (as hereinafter defined); (iii) 12
months following a termination of the Agreement by Crestar under
certain circumstances; (iv) 12 months after the termination of
the Agreement in accordance with its terms following the
occurrence of a Purchase Event or a Preliminary Purchase Event;
(v) upon receipt of any order or the notice of the Federal
Reserve Board, the OTS, the Maryland Bank Commissioner, the
Secretary of State of Delaware or the State Corporation
Commission of Virginia ("SCC") denying approval of the
Transaction, or (vi) March 31, 1995. The Stock Option Agreement
is attached hereto as Annex II.
Market Prices Prior to Announcement of the Transaction
The following is information regarding the last reported
sale price per share of Crestar Common Stock on the NYSE
Composite Transactions Tape on November 16, 1993, and the last
sale price per share of AB Common Stock known to AB on or before
November 16, 1993, the last business day prior to public
announcement of the Transaction.
Equivalent
Historical Proforma
Crestar AB(a) AB(b)
Common Stock $39.125 $8.00 $12.75
_______________
(a) The last sale of AB Common Stock known to AB occurring on or
before November 16, 1993 was on March 5, 1993.
-8-
(b) The amount of the equivalent price for AB Common Stock is
the product of multiplying an assumed Exchange Ratio of .326
shares of Crestar Common Stock (the result of dividing
$12.75 by the last sale price of Crestar Common Stock on
November 16, 1993 of $39.125) by $39.125 per share.
Comparative Per Share Data
The following table presents historical and pro forma per
share data for Crestar, and historical and equivalent pro forma
per share data for AB. The pro forma combined amounts give
effect to an assumed Exchange Ratio of .297 shares of Crestar
Common Stock for each share of AB Common Stock (based on the last
sale price of Crestar Common Stock on February 3, 1994 of
$42.875). The equivalent pro forma AB share amounts allow
comparison of historical information about one share of AB Common
Stock to the corresponding data about what one share of AB Common
Stock will equate to in the combined corporation and are computed
by multiplying the pro forma combined amounts by an assumed
Exchange Ratio of .297. As discussed in "The Holding Company
Merger -- Determination of Exchange Ratio and Exchange for
Crestar Common Stock," the final Exchange Ratio will be
determined based on the average closing price for Crestar Common
Stock during a 20-day pricing period prior to the Holding Company
Merger, subject to adjustment as set forth in the Agreement.
Crestar's fiscal year ends December 31 and AB's fiscal year
ends September 30. In the following table, AB financial data are
presented consistent with the fiscal year of Crestar. AB book
value per share is as of September 30, 1993 and December 31,
1992, and net income and dividend data reflect results for the
nine months and twelve months then ended.
The per share data included in the following table should be
read in conjunction with the consolidated financial statements of
Crestar incorporated by reference herein and the financial
statements of AB included herein and the notes accompanying all
such financial statements. The data presented below are not
necessarily indicative of the results of operations which would
have been obtained if the Holding Company Merger had been
consummated in the past or which may be obtainable in the future.
-9-
COMPARATIVE PER SHARE DATA
Nine Months Ended Year Ended
September 30, 1993 December 31, 1992
Book Value Per Share at Period End:
Crestar historical $27.77 $25.24
AB historical 8.72 8.21
Pro forma combined per
Crestar common share(1)(4) 27.78 25.26
Equivalent pro forma per AB common share 8.25 7.50
Cash Dividends Declared Per Share:
Crestar historical $ .81 $ .80
AB historical _ _
Pro forma combined per Crestar common
share(2) .79 .79
Equivalent pro forma per AB common share .23 .24
Net Income (Loss) Per Share:
Crestar historical $ 2.67 $ 2.32
AB historical .51 (2.01)
Pro forma combined per Crestar common
share(3)(4) 2.66 2.23
Equivalent pro forma per AB common share .79 .66
(1) Pro forma combined book value per Crestar common share
represents combined common shareholders'
equity amounts (net of preferred stock redemption
preference), divided by pro forma combined period-
end common shares outstanding.
(2) Pro forma combined dividends per Crestar common share
represent combined common dividends declared,
divided by pro forma combined average common shares
outstanding.
(3) Pro forma combined net income per Crestar common share
represents combined net income available to
common shareholders, divided by pro forma combined
average common shares outstanding.
(4) Pro forma combined book value per share and net income
per share amounts for Crestar and AB do not
reflect exercise of options to acquire shares of AB
Common Stock. Options to acquire 5,000 shares
were outstanding at September 30, 1993 and December
31, 1992. Assumed exercise of these options does
not have a significant impact upon either the combined
common shareholders' equity of Crestar and AB
or the pro forma combined net income per share.
-10-
Selected Financial Data
CRESTAR FINANCIAL CORPORATION
The following Crestar consolidated financial data is
qualified in its entirety by the information included in the
documents incorporated in this Proxy Statement/Prospectus by
reference. See "Incorporation of Certain Information by
Reference." Interim financial results, in the opinion of Crestar
management, reflect all adjustments necessary for a fair
presentation of the results of operations. All such adjustments
are of a normal recurring nature. The results of operations for
an interim period are not necessarily indicative of results that
may be expected for a full year or any other interim period.
<TABLE>
Nine Months
Ended
September 30, Years ended December 31,
1993 1992 1992 1991 1990 1989 1988
(Dollars in millions, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
Earnings: (1)
Net interest income . . . . . . . $389.1 $352.5 $482.1 $421.1 $414.2 $380.2 $356.2
Provision for loan losses . . . . 35.3 80.5 99.2 209.5 131.1 44.8 53.1
Net interest income after
provision for loan losses . . . 353.8 272.0 382.9 211.6 283.1 335.3 303.1
Noninterest income . . . . . . . 184.6 163.7 218.4 233.8 166.8 148.4 140.8
Noninterest expense . . . . . . . 392.8 371.3 501.8 405.6 378.8 362.8 340.1
Income before income taxes . . . 145.6 64.5 99.5 39.8 71.1 120.9 103.8
Income tax expense . . . . . . . 43.8 12.6 19.7 6.1 9.9 17.1 15.3
Net income . . . . . . . . . . . $101.8 $51.9 $79.8 $33.8 $61.1 $103.8 $88.5
Net income applicable
to common shares . . . . . . . . $99.9 $50.1 $77.3 $31.2 $58.5 $101.0 $84.7
Per Common Share Data:
Net income (primary) . . . . . . $2.67 $1.54 $2.32 $0.98 $1.87 $3.28 $2.85
Dividends declared (2) . . . . . 0.81 0.60 0.80 0.86 1.32 1.20 1.12
Book value . . . . . . . . . . . 27.77 24.33 25.24 23.23 23.15 22.73 20.85
Average primary
shares (thousands) . . . . . . . 37,429 32,587 33,286 31,921 31,218 30,739 29,710
Selected Period-End Balances:
Total assets . . . . . . . . . . $12,987.1 $11,800.3 $12,674.7 $11,828.3 $11,881.2 $11,360.8 $10,804.9
Loans (net of unearned income) . 7,052.3 6,623.2 6,581.7 7,065.8 7,680.2 7,769.3 7,726.4
Allowance for loan losses . . . . 213.0 210.4 205.0 210.0 149.4 93.2 90.6
Nonperforming assets (3) . . . . 134.8 266.1 220.8 350.0 237.2 75.1 54.3
Total deposits . . . . . . . . . 9,935.7 9,361.2 9,581.5 8,889.6 8,506.1 8,467.3 8,328.3
Long-term debt . . . . . . . . . 190.6 210.7 210.4 161.9 168.4 170.1 177.9
Common shareholders' equity . . . 1,049.9 794.3 913.9 749.9 726.3 705.3 626.4
Total shareholders' equity . . . 1,094.9 839.3 958.9 794.9 771.3 750.3 680.7
Average Balances:
Total assets . . . . . . . . . . $12,472.1 $11,837.9 $11,920.4 $11,440.7 $11,673.7 $10,659.4 $10,407.5
Loans (net of unearned income) . 6,745.9 6,790.6 6,725.3 7,275.3 7,767.2 7,682.1 7,545.8
Total deposits . . . . . . . . . 9,572.9 9,589.6 9,540.6 8,596.9 8,296.8 8,143.6 7,912.5
Long-term debt . . . . . . . . . 223.8 177.6 185.9 162.8 170.1 175.1 177.5
Common shareholders' equity . . . 975.9 768.9 794.6 744.1 731.7 670.5 596.1
Total shareholders' equity . . . 1,020.9 813.9 839.6 789.1 776.7 719.7 650.3
-11-
Ratios (4):
Return on average assets . . . . 1.09% 0.58% 0.67% 0.30% 0.52% 0.97% 0.85%
Return on average
shareholders' equity . . . . . . 13.29 8.51 9.50 4.28 7.87 14.43 13.61
Return on average common
shareholders' equity . . . . . . 13.65 8.68 9.73 4.19 7.99 15.06 14.21
Net interest margin (5) . . . . . 4.75 4.58 4.67 4.29 4.22 4.36 4.29
Nonperforming assets to
loans and foreclosed
properties at period end . . . . 1.90 3.94 3.32 4.90 3.08 0.97 0.70
Net charge-offs to average loans .97 1.76 1.69 2.07 0.99 0.55 0.97
Allowance for loan losses to:
Loans at period end . . . . . . 3.02 3.18 3.11 2.97 1.94 1.20 1.17
Nonperforming loans
at period end . . . . . . . . . 213 147 144 78 68 137 187
Nonperforming assets
at period end . . . . . . . . . 158 79 93 60 63 124 167
Total shareholders' equity
to total assets at
period end . . . . . . . . . . . 8.43 7.11 7.57 6.72 6.49 6.60 6.30
Capital ratios at period end: (6)
Tier 1 risk-adjusted capital . . 10.5 8.8 10.4 7.9 7.5 7.3 6.7
Total risk-adjusted capital . . 13.5 12.1 13.7 10.6 10.1 9.6 9.2
Tier 1 leverage . . . . . . . . 8.1 6.9 7.8 6.7 6.2 6.8 6.3
<FN>
_______________
(1) Amounts may not add due to rounding.
(2) In April 1991, Crestar announced that, thereafter, its dividend declaration would be made in the
month following the end of each quarter instead of in the last month of each quarter. As a result,
1991 included only three dividend declarations; however, four dividend payments were made.
(3) Nonperforming assets include nonaccrual loans, restructured loans and foreclosed properties.
(4) Certain ratios for the nine months ended September 30, 1993 and 1992 have been annualized for
purposes of comparability with prior years.
(5) Net interest margin is calculated on a taxable equivalent basis, using a tax rate of 35% for 1993 and
34% for 1992, 1991, 1990, 1989 and 1988.
(6) Based on 1992 final risk-adjusted capital guidelines.
</TABLE>
-12-
-13-
ANNAPOLIS BANCORP, INC.
The following AB consolidated financial data is qualified in
its entirety by the information included in this Proxy
Statement/Prospectus.
<TABLE>
Years ended September 30,
1993 1992 1991 1990 1989
(Dollars in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Earnings:
Net interest income . . . . . $ 9,953.1 $ 8,403.0 $ 8,971.4 $ 9,401.6 $ 9,146.2
Provision for loan losses . . 155.6 5,931.3 230.0 1,286.7 268.8
Net interest income after provision
for loan losses . . . . . . 9,797.5 2,471.7 8,741.4 8,114.9 8,877.4
Other income . . . . . . . . 762.6 1,339.1 1,104.6 1,987.2 2,511.5
Other expenses . . . . . . . 9,205.3 8,772.6 8,752.5 8,841.0 7,930.8
Income (loss) before income
taxes . . . . . . . . . . . 1,354.8 (4,961.8) 1,093.5 1,261.1 3,458.1
Income tax expense (benefit) 398.0 (2,094.0) 535.0 997.0 1,578.0
Net income (loss) . . . . . . $ 956.8 $(2,867.8) $ 558.5 $ 264.1 $ 1,880.1
Per Common Share Data:
Net income (loss) . . . . . . $ 0.79 $ (2.38) $ 0.51 $ .26 $ 1.88
Dividends declared . . . . . -- -- -- 0.38 0.50
Book value . . . . . . . . . 8.72 7.92 10.15 9.41 9.54
Average shares outstanding
(thousands) . . . . . . . . 1,205.5 1,205.5 1,094.6 1,000.0 1,000.0
Selected Period-End Balances:
Total assets . . . . . . . . $ 325,027.2 $ 353,727.7 $ 373,275.9 $ 382,108.8 $ 389,617.2
Loans (net of unearned
income) . . . . . . . . . . 218,875.8 241,625.3 263,867.3 278,113.3 294,154.8
Allowance for loan losses . . 2,900.8 3,200.2 1,205.1 1,742.3 579.1
Nonperforming assets (1) . . 15,238.0 22,709.0 11,406.0 10,195.0 3,731.0
Total deposits . . . . . . . 288,077.0 310,710.6 321,108.0 326,338.8 320,569.4
Total borrowings . . . . . . 23,930.6 31,102.0 36,128.3 42,122.0 54,679.1
Total shareholders' equity . 10,508.6 9,551.8 12,233.0 9,408.6 9,544.7
Average Balances:
Total assets . . . . . . . . $ 340,259.0 $ 369,829.0 $ 382,047.0 $ 393,206.0 $ 382,733.0
Loans (net of unearned
income) . . . . . . . . . . 224,796.0 257,956.0 273,417.0 292,893.0 315,531.0
Total deposits . . . . . . . 297,341.0 318,011.0 323,868.0 328,464.0 316,244.0
Total shareholders' equity . 10,131.0 11,961.0 10,943.0 9,898.0 8,301.0
Ratios:
Return on average assets . . 0.28% (0.78%) 0.15% 0.07% 0.49%
-14-
Return on average
shareholders' equity . . . . 9.44% (23.98%) 5.10% 2.67% 22.65%
Net interest margin . . . . . 3.26% 2.49% 2.54% N/A N/A
Nonperforming assets to loans
and real estate owned at
period end . . . . . . . . . 6.73% 8.99% 4.26% 3.65% 1.27%
Net charge-offs to average
loans . . . . . . . . . . . 0.20 1.53 0.28 0.04 0.14
Allowance for loan losses to:
Loans at period end . . . . 1.29 1.28 0.44 0.60 0.19
Nonperforming loans at
period end . . . . . . . . 62.79 37.53 18.36 24.56 18.62
Nonperforming assets at
period end . . . . . . . . 19.04 14.09 10.56 17.09 15.52
Total shareholders' equity to
total assets at period end . 3.23 2.70 3.28 2.46 2.45
Capital ratios at period
end: (2)
Tangible capital to adjusted total
assets . . . . . . . . . . 5.32 4.49 4.80 4.23 --
Core capital to adjusted total
assets . . . . . . . . . . 5.32 4.49 4.80 4.23 --
Risk-based capital to risk-
weighted assets . . . . . 9.63 7.63 7.64 6.81 --
<FN>
_______________
(1) Nonperforming assets include nonaccrual loans, restructured loans and foreclosed properties.
(2) Based on capital guidelines effective in 1990.
N/A Information not available.
</TABLE>
-15-
GENERAL INFORMATION
This Proxy Statement/Prospectus is furnished in connection
with the solicitation of proxies by the AB Board, to be voted at
the AB Shareholder Meeting to be held at __________
________________________________________, on __________ __, 1994,
at _____ __.m. and at any adjournment thereof. At the AB
Shareholder Meeting, shareholders will consider and vote upon the
Agreement and the related Holding Company Plan of Merger.
Pursuant to the Agreement, AB will merge with and into Crestar,
and Crestar will succeed to the business of AB. Only
shareholders of record of AB at the close of business on
__________ __, 1994 are entitled to notice of and to vote at the
AB Shareholder Meeting. This Proxy Statement/Prospectus is being
mailed to all such holders of record of AB Common Stock on or
about __________ __, 1994.
The affirmative vote of the holders of more than 50% of the
outstanding shares entitled to vote is required for approval of
the Holding Company Merger.
The proxies solicited hereby, if properly signed and
returned and not revoked prior to their use, will be voted in
accordance with the instructions given thereon by the
shareholders. If no instructions are so specified, the proxies
will be voted for the proposed Holding Company Merger. Any
shareholder giving a proxy has the power to revoke it at any time
before it is exercised by (i) filing written notice of revocation
with the Secretary of AB (Gail L. Marchand, Annapolis Bancorp,
Inc., 147 Old Solomons Island Road, Annapolis, Maryland 21401);
(ii) submitting a duly executed proxy bearing a later date; or
(iii) appearing at the AB Shareholder Meeting and notifying the
Secretary of his or her intention to vote in person. Proxies
solicited by this Proxy Statement/Prospectus may be exercised
only at the AB Shareholder Meeting and any adjournment of the AB
Shareholder Meeting and will not be used for any other meeting.
The accompanying proxy is being solicited by the AB Board.
The cost of such solicitation will be borne by AB. In addition
to the use of the mails, proxies may be solicited by personal
interview, telephone or telegram by directors, officers and
employees of AB or Crestar without additional compensation.
The AB Board has no information that other matters will be
brought before the meeting. If, however, other matters are
presented, the accompanying proxy will be voted in accordance
with the recommendations of the AB Board with respect to such
matters.
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As of the Record Date, the directors and executive officers
of AB and their affiliates beneficially owned a total of 918,156
shares (representing 75.85% of the outstanding shares of AB
Common Stock), and the directors of Crestar owned no AB Common
Stock. See "AB Security Ownership of Certain Beneficial Owners."
For the reasons described below, the AB Board has adopted
the Agreement, believes the Holding Company Merger is in the best
interest of AB and its shareholders and unanimously recommends
that shareholders of AB vote FOR approval of the Agreement. In
making its recommendation, the AB Board considered, among other
things, the opinion of Kaplan that the Merger Consideration was
fair to AB shareholders from a financial point of view. See "The
Holding Company Merger -- Background of the Holding Company
Merger," "-- Reasons and Basis for the Holding Company Merger,"
and "-- Opinion of Financial Advisor."
The address of Crestar is 919 East Main Street, Richmond,
Virginia 23219 and its telephone number is (804) 782-5000. The
address of AB is 147 Old Solomons Island Road, Annapolis,
Maryland 21401 and its telephone number is (410) 224-6800.
-17-
CRESTAR RECENT FINANCIAL RESULTS
Crestar reported net income of $140.5 million or $3.68 per
share for 1993, compared to the $79.8 million or $2.32 per share
earned in 1992. For the full year 1993, return on assets was
1.12%, return on total equity was 13.53% and return on common
equity was 13.90%.
Net income for the fourth quarter of 1993 totaled $38.7
million or $1.01 per share compared to $27.9 million or $.78 per
share in the fourth quarter of 1992. For the fourth quarter of
1993, return on assets was 1.20%, return on total equity was
14.19% and return on common equity was 14.60%.
Net interest income of $138.0 million in the fourth quarter
of 1993 was up 2% from the previous quarter and 6% from the
fourth quarter of 1992. For the full year 1993, net interest
income of $527.0 million was up 9% from 1992, primarily driven by
lower funding costs. The net interest margin in the fourth
quarter of 1993 of 4.77% was virtually unchanged from the
reported margin for the third quarter. The full year 1993 net
interest margin was 4.78%, up from the 4.67% reported for the
full year 1992. Loans at December 31, 1993 were $7.3 billion
compared to $7.1 billion at September 30, 1993 and $6.6 billion
at December 31, 1992.
Noninterest income of $248.3 million in 1993 increased 14%
from 1992. Noninterest expense of $523.0 million was up 4% from
the $501.8 million reported in 1992.
Net charge-offs were $15.5 million or .87% of average loans
in the fourth quarter of 1993 and $64.8 million or .95% of
average loans for the full year. Comparable numbers for 1992
were $24.1 million or 1.48% of average loans in the fourth
quarter and $113.9 million or 1.69% of average loans for the full
year.
The provision for loan losses was $13.5 million for the
fourth quarter of 1993 and $48.8 million for the full year, down
from $18.7 million in the fourth quarter of 1992 and $99.2
million for the full year of 1992.
Total nonperforming assets were reduced by 28% or $38.0
million during the fourth quarter of 1993 to $96.8 million or
1.32% of loans and foreclosed properties at December 31, 1993.
For the full year 1993, nonperforming assets were reduced by 56%
or $124.0 million. Nonperforming assets at December 31, 1993
included $79.8 million in nonperforming loans and $17.0 million
in other real estate owned. Nonperforming assets at December 31,
1993 comprised .73% of total assets, down from 1.04% at September
30, 1993 and 1.74% at December 31, 1992.
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The allowance for loan losses at December 31, 1993 was
$211.0 million and represented 2.89% of loans, 218% of
nonperforming assets and 264% of nonperforming loans.
At December 31, 1993, Crestar had total assets of $13.3
billion and total deposits of $10.2 billion. Equity capital of
$1.1 billion represented 8.00% of total assets. During the
fourth quarter of 1993, Crestar redeemed its $45 million of
outstanding Series B preferred stock.
Financial results of Crestar for 1993 do not reflect the
1994 acquisitions of Virginia Federal Savings Bank and Mortgage
Capital Corporation, nor do the results reflect the previously
announced and pending acquisitions of Providence Savings and Loan
Association, F.A. and NVR Federal Savings Bank. See "Business of
Crestar -- Recent Developments."
THE HOLDING COMPANY MERGER
The detailed terms of the Holding Company Merger are
contained in the Agreement and Plan of Reorganization, attached
as Annex I to this Proxy Statement/Prospectus. The following
discussion describes the more important aspects of the Holding
Company Merger and the terms of the Agreement. This description
is not complete and is qualified by reference to the Agreement
which is incorporated by reference herein.
Background of the Holding Company Merger
In early 1993, a Virginia-based financial institution
expressed interest in acquiring AB and Annapolis. To assist with
the negotiations, AB engaged Kaplan to serve as its financial
advisor in connection with the possible sale of AB and Annapolis.
Shortly thereafter, Kaplan contacted another financial
institution regarding a possible acquisition of AB and Annapolis
but that institution did not make an offer.
In September 1993, the Virginia-based financial institution
offered to acquire AB and Annapolis for a purchase price of
$10.10 per share in a stock-for-stock exchange. The AB Board
rejected the offer based on the inadequacy of the price and
instructed Kaplan to negotiate a higher price. As a result of
that negotiation, the institution increased its offer to $11.25
per share.
Before the AB Board made a decision on the revised offer,
Crestar, in early October 1993, submitted to the AB Board an
offer to acquire AB and Annapolis at a price of $12.75 per share
in a stock-for-stock exchange. Kaplan advised the other
institution of Crestar's offer, at which time the institution
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decided not to improve its offer, which expired in accordance
with its terms.
AB and Crestar entered into extensive negotiations resulting
in the signing of a letter of intent and the Stock Option
Agreement on November 16, 1993 and the Agreement on December 22,
1993.
Reasons and Basis for the Holding Company Merger
The AB Board has unanimously concluded that the Holding
Company Merger is in the best interests of AB shareholders and
has authorized consummation of the Holding Company Merger,
subject to the approval of shareholders and certain other
conditions set forth in the Agreement.
If the Holding Company Merger is consummated, AB
shareholders who exchange AB shares for Crestar shares will have
an equity interest in a larger and more diversified enterprise.
Crestar has substantially more outstanding shares held by more
shareholders than does AB.
The AB Board has received the opinion of Kaplan that the
consideration to be received by shareholders of AB in the Holding
Company Merger is fair to the shareholders of AB from a financial
point of view.
In the opinion of the Boards of Directors of Crestar and AB,
the Transaction will permit greater flexibility in responding to
the expanding financial needs of AB's customers and in meeting
the increasing competition for furnishing of financial services.
As a part of Crestar, AB customers will be offered services not
presently offered by AB.
The Transaction also will augment Crestar's ability to meet
the credit and other financial needs of consumers and businesses
in the counties of Anne Arundel, Prince George's, Charles and St.
Mary's. The Holding Company Merger reflects Crestar's desire to
continue expanding within the markets it serves, particularly the
Maryland area.
The Transaction will make the considerable commercial
lending resources and expertise of Crestar directly available to
commercial customers of AB. Crestar Bank MD's higher legal
lending limit of approximately $8.6 million (as of December 31,
1993) will be applicable to commercial customers of AB.
Equipment financing and inventory and accounts receivable
financing are examples of specialized services that will be
available. Other commercial services will include lockbox,
letters of credit, automated clearing houses, cash management
consultation, money market loans and electronic cash handling for
small businesses. Crestar's expertise in trust services,
-20-
including personal trust, investment advisory, corporate trust
and employee benefits services, also will be available to AB.
The services of Crestar Bank's subsidiaries, Crestar
Mortgage Corporation and Capitoline Investment Services
Incorporated, one of Virginia's largest investment advisory
firms, and Crestar's subsidiaries, Crestar Securities Corporation
and Crestar Insurance Agency, Inc., also will be available to AB
customers. The Transaction will give AB customers access to
Crestar's banking system with its 302 offices and 254 automated
teller machines (as of December 31, 1993).
Opinion of Financial Advisor
AB has retained Kaplan to act as its financial advisor in
connection with rendering a fairness opinion with respect to the
Holding Company Merger. Kaplan has rendered its opinion that,
based upon and subject to the various considerations set forth
therein, as of December 21, 1993 and the date of this Proxy
Statement/Prospectus, the Merger Consideration, that is, valuing
the shares of AB Common Stock at $12.75 per share for purposes of
determining the Exchange Ratio or the amount to be paid holders
of AB Common Stock who make the cash election, resulted in
consideration that was fair, from a financial point of view, to
the holders of AB Common Stock. No limitations were imposed on
Kaplan by the AB Board with respect to the investigations made or
procedures followed by it in rendering its opinion. Kaplan is
familiar with AB, having acted as its financial advisor in
connection with, and having participated in, the negotiations
leading to the Agreement. The Merger Consideration was
determined through arm's length negotiations between Kaplan, as
AB's advisor, and Crestar. Representatives of Kaplan attended
the meeting of the AB Board on November 4, 1993, where the
proposed Holding Company Merger was considered and AB's
management and advisors were authorized to continue and complete
negotiations of an option agreement and a definitive merger
agreement with Crestar to be recommended to the AB Board.
Representatives of Kaplan also attended the meeting of the AB
Board on December 14, 1993, where the proposed Holding Company
Merger was considered and discussed.
The full text of Kaplan's opinion as of the date hereof,
which sets forth the assumptions made, matters considered and
limitations of the review undertaken, is attached as Annex III to
this Proxy Statement/Prospectus and is incorporated herein by
reference, and should be read in its entirety in connection with
this Proxy Statement/Prospectus. The summary of the opinion of
Kaplan set forth in this Proxy Statement/Prospectus is qualified
in its entirety by reference to the full text of such opinion.
The December 21, 1993 opinion was substantially identical to the
opinion attached hereto.
-21-
Kaplan's opinion is directed only to the Merger
Consideration and does not constitute a recommendation to any
holders of AB Common Stock as to how such holders of AB Common
Stock should vote at the AB Shareholder Meeting or as to any
other matter.
In connection with its opinion dated the date hereof, Kaplan
reviewed and analyzed material bearing upon the financial and
operating condition of AB and Crestar and material prepared in
connection with the Holding Company Merger, including, among
other things: (a) the Agreement and the Stock Option Agreement;
(b) this Proxy Statement/Prospectus; (c) publicly available
reports filed with the OTS by AB and with the SEC by Crestar; (d)
certain other publicly available financial and other information
concerning AB and Crestar and the trading markets for the
publicly traded securities of Crestar; (e) certain other internal
information relating to AB and Crestar prepared by the management
of AB and Crestar and furnished to Kaplan for purposes of its
analysis; and (f) publicly available information concerning
certain other banks and bank holding companies, savings and loan
associations, savings and loan holding companies, the trading
markets for their securities and the nature and terms of certain
other merger and acquisition transactions believed relevant to
its inquiry. Kaplan also met with certain officers and
representatives of AB and Crestar to discuss the foregoing as
well as other matters relevant to its inquiry, including the past
and current business operations, results of regulatory
examinations, financial condition and future prospects of AB and
Crestar, both separately and on a combined basis. In addition,
Kaplan reviewed the reported price and trading activity for
Crestar Common Stock, compared certain financial and stock market
information for Crestar and financial information for AB with
similar information for certain other companies, the securities
of which are publicly traded, reviewed the financial terms of
certain recent business combinations in the commercial banking
and thrift industries, and performed such other studies and
analyses as it considered appropriate. Kaplan also took into
account its assessment of general economic, market and financial
conditions and its experience in other transactions, as well as
its experience in securities valuations and knowledge of the
commercial banking and thrift industries generally.
In conducting its review and arriving at its opinions,
Kaplan relied upon and assumed the accuracy and completeness of
the financial and other information provided to it or publicly
available and did not attempt independently to verify the same.
Kaplan did not conduct physical inspections of any of the
properties or assets of AB or Crestar, and Kaplan did not make or
obtain any evaluations or appraisals of any properties, assets or
liabilities of AB or Crestar. Kaplan was retained by the AB
Board to express an opinion as to the fairness, from a financial
-22-
point of view, to the holders of AB Common Stock of the Merger
Consideration in the Holding Company Merger.
In connection with rendering its opinions to the AB Board,
Kaplan performed a variety of financial analyses that are
summarized below. The summary of the presentations by Kaplan to
the AB Board as set forth herein does not purport to be a
complete description of such presentations. Kaplan believes that
its analyses and the summary set forth herein must be considered
as a whole and that selecting portions of such analyses and the
factors considered therein, without considering all factors and
analyses, could create an incomplete view of the analyses and
processes underlying its opinions. The preparation of a fairness
opinion is a complex process involving subjective judgments and
is not necessarily susceptible to partial analyses or summary
description. In its analyses, Kaplan made numerous assumptions
with respect to industry performance, business and economic
conditions, and other matters, many of which are beyond the
control of AB or Crestar. Any estimates contained in Kaplan's
analyses are not necessarily indicative of actual future values
or results, which may be significantly more or less favorable
than suggested by such estimates. Estimates of values of
companies do not purport to be appraisals or necessarily reflect
the prices at which companies or their securities actually may be
sold. No company or transaction utilized in Kaplan's analyses
was identical to AB or Crestar or the Holding Company.
Accordingly, such analyses are not based solely on arithmetic
calculations; rather, they involve complex considerations and
judgments concerning differences in financial and operating
characteristics of the relevant companies, the timing of the
relevant transactions, and prospective buyer interest, as well as
other factors that could affect the public trading values of the
company or companies to which they are being compared. None of
the analyses performed by Kaplan was assigned greater
significance by Kaplan than any other.
The following is a brief summary of the analyses performed
by Kaplan in connection with its opinions;
(a) Net Present Value Analysis. Applying a discounted
cash flow methodology and various operating assumptions,
Kaplan prepared a net present value analysis that indicated
theoretical values for AB based on a range of price-to-
earnings ("P/E") multiples between 11.0x and 14.0x and
discount rates between 12.0% and 18.0%. The range of values
was based on a range of earnings for the next five years
assuming annual earnings growth of 10.0%. The results of
this analysis indicated a range of theoretical values for AB
between $6.15 per share (P/E of 11.0x; 18.0% discount rate)
and $10.16 per share (P/E of 14.0x; 12.0% discount rate).
-23-
Kaplan also prepared a net present value analysis based upon
a range of terminal price-to-book values between 120.0% and
150.0% and discount rates between 12.0% and 18.0%. The
range of values was based upon an assumed earnings growth
rate of 10.0%, and AB being sold in five years. The
analysis indicated a range of values for AB between $7.37
(18.0% discount rate; terminal book value of 120.0%) and
$11.96 (12.0% discount rate; terminal book value of 150.0%).
Kaplan also prepared analyses of comparative theoretical
shareholder returns for several scenarios, including AB
remaining independent, AB being sold to another third party
and AB accepting the Crestar offer. Additional Kaplan
analyses evaluated the future prospects of AB and Crestar on
a proforma combined basis based on various estimates of
proforma net income for the twelve month period ending
September 30, 1993.
(b) Exchange Ratio Analysis. The Crestar offer is a
fixed price of $12.75 per AB share, with a floating number
of Crestar Common Stock shares exchanged, based on the
Average Closing Price. Consequently, the Exchange Ratio is
subject to adjustment as the price of the Crestar Common
Stock changes. The nominal value of Crestar's offer of
$12.75 per share, is a 146.7% multiple of AB's September 30,
1993 book value.
The $12.75 per share offer for AB, based on the average of
the closing prices of Crestar Common Stock during the twenty
trading days ending on the third day preceding December 10,
1993, which was $39.16, resulted in an Exchange Ratio of
0.326 shares of Crestar Common Stock for each share of AB
Common Stock.
(c) Financial Implications to AB Shareholders. Kaplan
presented to the AB Board an analysis of the financial
implications of the Crestar proposal to AB shareholders.
This analysis showed that, on a proforma common share
equivalent basis, a shareholder of AB would achieve, as a
result of the proposal, a 39.57% improvement in earnings per
share and a modest 3.19% dilution in stated tangible book
value per share. AB shareholders would also receive a
dividend of $0.32 per share of AB Common Stock exchanged in
the Holding Company Merger.
(d) Comparable Transaction Analysis. Kaplan performed
an analysis of prices and premiums paid in recent thrift
acquisition transactions nationwide. Multiples of earnings
and fully-diluted book value implied by the consideration to
be received by AB shareholders in the Holding Company Merger
were compared with multiples paid in such nationwide thrift
transactions, which included selected pending and completed
-24-
acquisitions of thrifts with total assets less than $1
billion and nonperforming assets greater than 2.0% of total
assets, announced between January 1, 1992 and December 10,
1993. The average offer price to book value for this
nationwide group of comparable transactions was 113.9%. The
equivalent offer price to book value for AB was 146.7% based
on the $12.75 offer price for each outstanding share of AB
Common Stock and AB shareholders' equity as of September 30,
1993. The average multiple of offer price to latest twelve
months earnings was 12.0x for the comparative group, as
compared to 16.1x for AB.
Kaplan also performed an analysis of selected pending and
completed acquisitions announced between January 1, 1992 and
December 10, 1993, of thrifts headquartered in Mid-Atlantic
states with total assets less than $1 billion and
nonperforming assets greater than 2.0% of total assets. The
average offer price to book value for this group of
comparable transactions was 99.5%. The equivalent offer
price to book value for AB was 146.7%. The average multiple
of offer price to latest twelve months earnings was 15.1x
for the comparative group, as compared to 16.1x for AB.
The thrift transactions included in the Mid-Atlantic states
averages noted above are summarized in the following table:
Selected Mid-Atlantic Thrift Transactions
State State
of of
Buyer Target Buyer Target
NC NC First Citizens Pioneer Bancorp, Inc.
BancShares, Inc.
NJ NJ HUBCO, Inc. Washington Bancorp, Inc.
VA VA Crestar Financial CFS Financial Corporation
Corporation
VA VA Crestar Financial Providence Savings & Loan
Corporation Association
NJ NY First Fidelity SB of Rockland County
Bancorporation
NJ NJ Collective Bancorp, Inc. Montclair Bancorp Inc.
PA PA PNC Bank Corp. Flagship Financial Corp.
NC NC Southern National First Security Federal
Corporation Savings Bank
-25-
PA NJ Sovereign Bancorp, Inc. Harmonia Bancorp, Inc.
PA PA Sovereign Bancorp, Inc. Valley Federal Savings &
Loan Association
NJ NY First Fidelity Village Financial
Bancorporation Services, Ltd.
PA PA Keystone Financial, Inc. Elmwood Bancorp, Inc.
(e) Comparable Company Analysis. In performing its
comparable company analyses, Kaplan examined the operating
performance of AB in comparison to publicly traded thrift
institutions that Kaplan deemed to be comparable to AB.
This group of companies included eleven publicly traded
thrift institutions with headquarter locations in various
Mid-Atlantic and Northeastern states having total assets
between $200 million and $700 million, last twelve months
return on average assets ("LTM ROAA") between .63% and 1.91%
and equity/assets between 5.06% and 8.96%. The group
included Atlanfed Bancorp, Inc. (Maryland), Family Bancorp
(Massachusetts), First Citizens Financial Corp. (Maryland),
First Essex Bancorp, Inc. (Massachusetts), Greenwich
Financial Corp. (Connecticut), Marble Financial Corp.
(Vermont), NFS Financial Corp. (New Hampshire), TideMark
Bancorp, Inc. (Virginia), Virginia First Savings Bank,
F.S.B. (Virginia), Warren Bancorp, Inc. (Massachusetts), and
Washington Federal Savings Bank (Virginia).
(f) Other Analyses. The Kaplan analysis also included
summary income statement and balance sheet data and selected
ratio analyses for Crestar and various other potential
acquirors of AB. In addition, on December 14, 1993, the
senior management of AB, in conjunction with Kaplan and AB's
legal counsel, summarized certain historical financial
information of Crestar and Kaplan reported to the AB Board
regarding the results of its interviews with Crestar
management conducted on November 16, 1993.
In connection with its opinion as of the date hereof, Kaplan
also confirmed the appropriateness of its reliance on the
analyses used to render its December 21, 1993 opinion by
performing procedures to update certain of such analyses and by
reviewing the assumptions on which such analyses were based and
the factors considered in connection therewith.
Kaplan is a nationally recognized financial advisory and
consulting firm that specializes in the commercial banking,
thrift and mortgage banking industries. Kaplan is regularly
engaged in the independent valuation of businesses and securities
in connection with mergers and acquisitions, initial public
-26-
offerings, private placements, recapitalizations and valuations
for estate, corporate and other purposes. The AB Board selected
Kaplan to serve as its financial advisor on the basis of its
reputation, experience and expertise in transactions such as the
Holding Company Merger.
Pursuant to the terms of an engagement letter dated June 9,
1993, AB agreed to pay Kaplan a retainer fee of $35,000, payable
in two installments for acting as a financial advisor. In
addition, AB has agreed to pay Kaplan a fee of 1.50% of the
aggregate consideration received by AB shareholders in the
Holding Company Merger (including any funds advanced by Crestar
to prepay the FNB Loan). The $35,000 retainer is credited
against the 1.50% fee and $65,000 was paid to Kaplan upon
execution of the Agreement. The remainder of the 1.50% fee is
payable upon consummation of the Holding Company Merger. At
February 1, 1994, the additional fees payable to Kaplan pursuant
to the provision of the engagement letter amounted to
approximately $240,000. Whether or not the Holding Company
Merger is consummated, AB also has agreed to reimburse Kaplan for
its reasonable out-of-pocket expenses, including all reasonable
fees and disbursements of counsel, and to indemnify Kaplan and
certain related persons against certain liabilities relating to
or arising out of its engagement.
Effective Time of the Holding Company Merger
The Holding Company Merger shall become effective at the
later of the time the Holding Company Plan of Merger filed with
the SCC is made effective or such other certificate as required
by the Secretary of State of Delaware is made effective (the
"Effective Time of the Holding Company Merger"). The Effective
Time of the Holding Company Merger is expected to occur during
the second calendar quarter of 1994. It is expected that
immediately following the Effective Time of the Holding Company
Merger, Annapolis will merge directly or indirectly into Crestar
Bank MD. Either AB or Crestar may terminate the Agreement if the
Transaction has not been consummated by September 30, 1994.
Until the Effective Time of the Holding Company Merger
occurs, AB shareholders will retain their rights as shareholders
to vote on matters submitted to them by the AB Board.
Determination of Exchange Ratio and Exchange for Crestar Common
Stock
Crestar valued AB Common Stock for purposes of the exchange
at $12.75 per share. The valuation of AB Common Stock was based
upon the potential value of AB Common Stock, the nature of AB's
banking and savings bank businesses, and AB's deposit base,
market share and market franchise in and around the Annapolis
area. Each share of AB Common Stock (other than shares held by
-27-
Crestar, shares to be exchanged for cash and Dissenting Shares)
shall be converted into the number of shares of Crestar Common
Stock determined by dividing $12.75 per share of AB Common Stock
(the "Price Per Share") by the Average Closing Price (the result
of the quotient determined by dividing the Price Per Share by the
Average Closing Price being called the Exchange Ratio), subject
to adjustment in certain circumstances. The Exchange Ratio at
the Effective Time of the Holding Company Merger shall be
adjusted to reflect any consolidation, split-up, other
subdivisions or combinations of Crestar Common Stock, any
dividend payable in Crestar Common Stock, or any capital
reorganization involving the reclassification of Crestar Common
Stock subsequent to the date of the Agreement. Based on the
$42.875 closing price of Crestar Common Stock on the NYSE on
February 3, 1994, the Exchange Ratio would have been .297 shares
of Crestar Common Stock per share of AB Common Stock. Based on
the 1,206,500 shares of AB Common Stock outstanding as of the
Record Date, and assuming that no cash is to be paid to AB
shareholders in connection with the Holding Company Merger, such
Exchange Ratio would have resulted in the issuance of
approximately 360,000 shares of Crestar Common Stock. Such
number of shares will vary to the extent that (i) shares of AB
Common Stock are exchanged for cash and (ii) the components of
the Exchange Ratio calculation change prior to the Effective Time
of the Holding Company Merger. The number of shares of Crestar
Common Stock to be issued in connection with the Holding Company
Merger also will vary to the extent that outstanding options to
purchase 4,000 shares of AB Common Stock are exercised prior to
the Effective Time of the Holding Company Merger. See "-- Effect
on AB Employee Benefits Plans" below.
Following the Effective Time of the Holding Company Merger,
former shareholders of AB will be mailed a Letter of Transmittal
which will set forth the procedures that should be followed for
exchange of AB Common Stock for Crestar Common Stock or cash.
Shareholders of AB, upon surrender of their certificates for
cancellation, will be entitled to receive certificates
representing the number of whole shares of Crestar Common Stock
for which such shares have been submitted for exchange and cash
in lieu of any fractional share interest on the basis of the
Exchange Ratio.
Cash Election; Election Procedures
Before or promptly after the Effective Time of the Holding
Company Merger, Crestar Bank, acting in the capacity of exchange
agent for Crestar (the "Exchange Agent"), will mail the Election
Form to each person who, as of the Effective Time of the Holding
Company Merger, holds shares of AB Common Stock. The Election
Form will permit holders of shares of AB Common Stock to elect to
exchange their shares based on the Exchange Ratio, see
-28-
"-- Determination of Exchange Ratio and Exchange for Crestar
Common Stock," or for the Price Per Share in cash (less all
applicable withholding taxes). The number of shares that may be
exchanged for cash, when added to Dissenting Shares, shall not
exceed 30% of the outstanding shares of AB Common Stock
immediately prior to the Effective Time of the Holding Company
Merger. If the aggregate of (i) shares for which a cash election
is made and (ii) Dissenting Shares exceeds 30% of the outstanding
shares of AB Common Stock immediately prior to the Effective Time
of the Holding Company Merger, Crestar first will pay cash for
shares submitted for cash exchange by each holder of 100 or fewer
AB shares (if such holder has submitted all his shares for cash
exchange) and then will pay cash for shares submitted for cash
pro rata. Shares not exchanged for cash after proration will be
exchanged for Crestar Common Stock at the Exchange Ratio.
An election to receive cash or stock will be properly made
only if the Exchange Agent has received a properly completed
Election Form in accordance with the procedures and within the
time period set forth in the Election Form. An Election Form
will be properly completed only if accompanied by certificates
representing all shares of AB Common Stock covered thereby.
AB SHAREHOLDERS SHOULD NOT SEND IN THEIR CERTIFICATES UNTIL
THEY RECEIVE THE ELECTION FORM OR LETTER OF TRANSMITTAL AND
INSTRUCTIONS.
Business of AB Pending the Holding Company Merger
AB has agreed that until the Effective Time of the Holding
Company Merger it will operate its business substantially as
presently operated and only in the ordinary course. In this
connection, AB has agreed that it will not, without the prior
written consent of Crestar, (i) make any change in the
compensation or title of Gilbert L. Hardesty, Allen W. Bach,
David R. Chisholm, Thomas B. Peet or Carol B. Brandt; (ii) make
any change in the compensation or title of any other employee,
other than those permitted by current employment policies in the
ordinary course of business, any of which changes shall be
reported promptly to Crestar; (iii) except as set forth in the
Agreement enter into any bonus, incentive compensation, deferred
compensation, profit sharing, thrift, retirement, pension, group
insurance or other benefit plan or any employment or consulting
agreement or increase benefits under existing plans; (iv) create
or otherwise become liable with respect to any indebtedness for
money borrowed or purchase money indebtedness except in the
ordinary course of business; (v) amend its, or Annapolis'
Certificate of Incorporation, Charter or Bylaws; (vi) issue or
contract to issue any shares of AB capital stock or securities
exchangeable for or convertible into capital stock, except (A) up
to 4,000 shares of AB Common Stock to be issued pursuant to the
exercise of employee stock options outstanding as of December 31,
-29-
1993 and (B) pursuant to the Stock Option Agreement;
(vii) purchase any shares of AB capital stock; (viii) enter into
or assume any material contract or obligation, except in the
ordinary course of business; (ix) waive any right of substantial
value; (x) propose or take any other action which would make any
representation or warranty of AB in the Agreement untrue;
(xi) introduce any new products or services or change the rate of
interest on any deposit instrument to above-market interest
rates; (xii) make any change in policies respecting extensions of
credit or loan charge-offs; (xiii) change reserve requirement
policies; (xiv) change securities portfolio policies; (xv) enter
into any new agreement, amendment or endorsement or make any
changes relating to insurance coverage, including coverage for
its directors and officers, which would result in an additional
payment obligation of $50,000 or more; or (xvi) propose or take
any action with respect to the closing of any branches.
At the request of Crestar and upon receipt by AB and
Annapolis of written confirmation from Crestar and Crestar Bank
MD that there are no conditions to the obligations of Crestar and
Crestar Bank MD under the Agreement which they believe will not
be fulfilled so as to permit them to consummate the Transaction,
on the day prior to the Effective Time of the Holding Company
Merger, AB shall establish such additional accruals, reserves and
charge-offs, through appropriate entries in its accounting books
and records, as may be necessary to conform AB's accounting and
credit loss reserve practices and methods to those of Crestar (as
such practices and methods are to be applied from and after the
Effective Time of the Holding Company Merger) and to Crestar's
plans with respect to the conduct of the business of AB and
Annapolis following the Holding Company Merger, as well as for
the anticipated recapture of the bad debt reserves established by
Annapolis for federal income tax purposes (and state income tax
purposes, if applicable) prior thereto and the costs and expenses
relating to the consummation by AB and Annapolis of the
Transaction. Any such accruals, reserves and charge-offs shall
not be deemed to cause any representation and warranty of AB and
Annapolis in the Agreement to not be true and accurate as of the
Effective Time of the Holding Company Merger. Subject to the
requirements set forth in the immediately preceding sentence,
prior to the Effective Time of the Holding Company Merger, AB
also shall adopt Financial Accounting Standards Board Statement
No. 106 by immediately recognizing the cumulative impact of such
accounting statement.
FNB Loan
Crestar has agreed that it will extend a loan in an amount
of approximately $7.3 million to AB to enable AB to prepay in
full its loan to FNB, see "Business of AB -- FNB Loan," on or
before the Closing Date, or June 30, 1994, whichever date is
earlier. Alternatively, AB shall have received the written
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consent of FNB within 30 days before the Closing Date for the
parties to consummate the transactions contemplated under the
Agreement.
Conditions to Consummation of the Holding Company Merger
Consummation of the Holding Company Merger is conditioned
upon the approval of the holders of more than 50% of the
outstanding AB Common Stock entitled to vote at the AB
Shareholder Meeting. The Holding Company Merger must be approved
by the Federal Reserve Board, the OTS and the Maryland Bank
Commissioner, which approvals are expected to be received. The
obligations of AB and Crestar to consummate the Holding Company
Merger are further conditioned upon (i) the accuracy of the
representations and warranties of AB contained in the Agreement,
including without limitation the representation and warranty that
there has been no material adverse change in the consolidated
financial condition, results of operations, business or prospects
of AB since June 30, 1993, as defined in the manner set forth in
the Agreement; (ii) the performance of all covenants and
agreements contained in the Agreement, including without
limitation the establishment of the accruals, reserves and
charge-offs referred to under "-- Business of AB Pending the
Holding Company Merger" above; (iii) the receipt of an opinion of
Hunton & Williams, counsel to Crestar and Crestar Bank MD, with
respect to certain of the tax consequences of the Transaction
described herein under "-- Certain Federal Income Tax
Consequences;" (iv) the receipt of opinions of counsel with
respect to certain legal matters; (v) the execution and delivery
of a commitment and undertaking by each shareholder of AB who is
an affiliate of AB to the effect that (A) such shareholder will
dispose of the shares of Crestar Common Stock received by him in
connection with the Holding Company Merger only in accordance
with the provisions of paragraph (d) of Rule 145, (B) such
shareholder will not dispose of any of such shares until Crestar
has received an opinion of counsel acceptable to it that such
proposed disposition is in compliance with the provisions of
paragraph (d) of Rule 145, which opinion shall be rendered
promptly following counsel's receipt of such shareholder's
written notice of its intention to sell shares of Crestar Common
Stock and (C) the certificates representing said shares may bear
a legend referring to the foregoing restrictions; (vi) the shares
of Crestar Common Stock to be issued in the Holding Company
Merger shall have been duly registered under the 1933 Act and
applicable state securities laws, and such registration shall not
be subject to a stop order or any threatened stop order by the
SEC or any applicable state securities authority; (vii) in the
case of AB, the receipt of the opinion of Kaplan with respect to
fairness to AB shareholders from a financial point of view; and
(viii) (A) Crestar shall have received a copy of the written
consent of FNB within 30 days before the Closing Date for the
parties to consummate the transactions contemplated hereby, or
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(B) the FNB Loan shall have been paid in full, on or before the
Closing Date or June 30, 1994, whichever date shall first occur
and the Loan Agreement (as hereinafter defined) shall have
terminated.
Crestar and AB may waive any condition to their obligations
to consummate the Holding Company Merger except requisite
approvals of Crestar and AB shareholders and regulatory
authorities.
Stock Option Agreement
Crestar and AB entered into the Stock Option Agreement,
dated as of November 16, 1993, pursuant to which AB issued to
Crestar an option to purchase up to 240,000 shares of AB Common
Stock at a purchase price of $10.00 per share.
The option is exercisable only upon the occurrence of a
Purchase Event (as defined below). A Purchase Event means any of
the following events: (i) without Crestar's prior written
consent, AB shall have authorized, recommended or publicly
proposed, or entered into an agreement with any person (other
than Crestar or any subsidiary thereof) (A) to effect a merger,
consolidation or similar transaction, (B) for the disposition, by
sale, lease, exchange or otherwise, of 15% or more of the
consolidated assets of AB and its subsidiaries or (C) for the
issuance, sale or other disposition of securities representing
25% or more of the voting power of AB or any of its subsidiaries
(collectively referred to as an "Acquisition Transaction"); or
(ii) any person (other than Crestar or any subsidiary thereof)
shall have acquired beneficial ownership of 25% or more of AB
Common Stock.
The Stock Option Agreement terminates in accordance with its
terms on the date on which occurs the earliest of: (i) the
Effective Time of the Holding Company Merger (as defined in the
Agreement); (ii) a termination of the Agreement in accordance
with its terms (other than by Crestar under certain
circumstances) prior to the occurrence of a Purchase Event or a
Preliminary Purchase Event (as defined below); (iii) 12 months
following a termination of the Agreement by Crestar under certain
circumstances; (iv) 12 months after the termination of the
Agreement in accordance with its terms following the occurrence
of a Purchase Event or a Preliminary Purchase Event; (v) upon
receipt of any order or notice of the Federal Reserve Board, the
OTS, the Maryland Bank Commissioner, the Delaware Secretary of
State or the SCC denying approval of the Transaction; and
(vi) March 31, 1995.
A Preliminary Purchase Event means any of the following
events: (i) any person shall have commenced a tender offer or
exchange offer to acquire 25% or more of AB Common Stock (a
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"Tender Offer"); or (ii) AB's shareholders shall have failed to
adopt the Agreement at a meeting called for such purpose or such
meeting shall not have been held or shall have been canceled or
the AB Board shall have withdrawn its recommendation to
shareholders, in each case following the public announcement of
(A) a Tender Offer, (B) a proposal to engage in an Acquisition
Transaction, or (C) the filing of an application or notice to
engage in an Acquisition Transaction.
Termination
The Agreement shall be terminated, and the Transaction
abandoned, if the shareholders of AB shall not have approved the
Holding Company Merger. Notwithstanding such approval by such
shareholders, the Agreement also may be terminated at any time
prior to the Effective Time of the Holding Company Merger, by:
(i) the mutual consent of Crestar, Crestar Bank MD, AB and
Annapolis, as expressed by their respective Boards of Directors;
(ii) either Crestar or Crestar Bank MD on the one hand or AB or
Annapolis on the other hand, as expressed by their respective
Boards of Directors, after September 30, 1994; (iii) by Crestar
and Crestar Bank MD in writing authorized by its respective Board
of Directors if AB or Annapolis has, or by AB and Annapolis in
writing authorized by its respective Board of Directors if
Crestar or Crestar Bank MD has, in any material respect, breached
(A) any covenant or agreement contained in the Agreement, or
(B) any representation or warranty contained in the Agreement, in
any case if such breach has not been cured by the earlier of
30 days after the date on which written notice of such breach is
given to the party committing such breach or the Closing Date;
(iv) either Crestar or Crestar Bank MD on the one hand or AB or
Annapolis on the other hand, as expressed by their respective
Boards of Directors, in the event that any of the conditions
precedent to the obligations of such parties to consummate the
Holding Company Merger have not been satisfied or fulfilled or
waived by the party entitled to so waive on or before the Closing
Date (as defined in the Agreement), provided that neither party
shall be entitled to terminate the Agreement if the condition
precedent or conditions precedent which provide the basis for
termination can reasonably be and are satisfied within a
reasonable period of time, in which case, the Closing Date shall
be appropriately postponed; (v) Crestar and Crestar Bank MD, if
the Boards of Directors of Crestar and Crestar Bank MD shall have
determined in their sole discretion, exercised in good faith,
that the Holding Company Merger has become inadvisable or
impracticable by reason of (A) the threat or the institution of
any litigation, proceeding or investigation to restrain or
prohibit the consummation of the transactions contemplated by the
Agreement or to obtain other relief in connection with the
Agreement or (B) public commencement of a competing offer for AB
Common Stock which is significantly better than Crestar's offer,
is accepted or not opposed by AB and which Crestar certifies to
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AB, in writing, it is unwilling to meet; (vi) Crestar, Crestar
Bank MD, AB or Annapolis, if the Federal Reserve Board, the OTS
or the Maryland Bank Commissioner deny approval of the
Transaction and the time period for all appeals or requests for
reconsideration has run; or (vii) Crestar and Crestar Bank MD if
dissents to the Holding Company Merger shall have been filed with
AB by the holders of 15% or more of the outstanding shares of AB
Common Stock pursuant to Section 262 of the DGCL.
Accounting Treatment
The Transaction is to be accounted for as a purchase in
accordance with generally accepted accounting principles as
outlined in Accounting Principles Board Opinion No. 16.
Operations After the Holding Company Merger
After the consummation of the Transaction, Crestar Bank MD
will continue generally to conduct the business presently
conducted by Annapolis, with the additional services discussed
above.
Prior to the Effective Time of the Holding Company Merger,
members of Annapolis' senior management group will be interviewed
by Crestar with the goal of determining if there are mutually
beneficial employment opportunities available within Crestar.
Crestar Bank MD will undertake to continue employment of all
Annapolis branch personnel who meet Crestar Bank MD's employment
qualification requirements, either at existing Annapolis offices
or at Crestar Bank MD offices within reasonable commuting
distance. Annapolis non-branch personnel not offered employment
will be interviewed prior to the Effective Time of the Holding
Company Merger for open positions within Crestar. Any employee
who is terminated or whose position is eliminated by Crestar
within six months after the Effective Time of the Bank Merger (as
defined in the Agreement), and not offered a comparable job
(other than Gilbert L. Hardesty, Allen W. Bach, David R.
Chisholm, Thomas B. Peet and Carol B. Brandt, or those under
employment contracts who are terminated, if any, and paid in
accordance with their respective employment contract), will be
paid severance pay equal to one week's base pay for each year of
service with Annapolis up to 20 years and two weeks of base pay
for each year of service with Annapolis over 20 years, but in no
case less than eight weeks' base pay.
All employees of AB and Annapolis who are employed by
Crestar Bank MD ("Transferred Employees") will be covered by
Crestar's employee benefit plans as to which they are eligible
based on their length of service, compensation, job
classification, and position, including, where applicable, the
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incentive compensation plan. For additional information, see
"-- Effect on AB Employee Benefits Plans" below.
Crestar continually seeks acquisition opportunities with
other financial institutions in which it may pay cash or issue
common stock or other equity or debt securities. As of the date
of this Proxy Statement/Prospectus, Crestar has no present
agreements or understandings to acquire or merge with any other
businesses other than as described in "Business of Crestar --
Recent Developments."
Interest of Certain Persons in the Transaction
Certain members of AB's and Annapolis' management may be
deemed to have interests in the Transaction in addition to their
interests as shareholders of AB generally. In each case, the
Board of Directors of AB or Annapolis either was aware of their
potential interests, and considered them, among other matters, in
approving the Agreement and the transactions contemplated
thereby.
Advisory Board. Directors of AB and Annapolis in office
immediately prior to the Effective Time of the Holding Company
Merger will be offered a position on Crestar Bank MD's local
advisory board in Annapolis for a term of one year commencing at
the Effective Time of the Holding Company Merger. Such members
who agree to serve on the Annapolis local advisory board in
accordance with the guidelines set forth in the Agreement will
receive a fee of $1,000. In addition, these directors will
receive $300 for each meeting attended.
Indemnification. After the Effective Time of the Holding
Company Merger, Crestar shall indemnify and hold harmless
directors, officers, employees and agents who have rights to
indemnification from AB or Annapolis under the Bylaws of AB and
Annapolis (the "Indemnified Parties") from and against any and
all claims arising out of or in connection with activities in
such capacity prior to the Effective Time of the Holding Company
Merger, or on behalf of, or at the request of AB, Annapolis or
any other direct or indirect subsidiary of AB ("Claims") and
shall advance expenses incurred with respect to the foregoing, as
they are incurred, in each case to the fullest extent permitted
under the Bylaws of AB and Annapolis as in effect on the date of
the Agreement and the DGCL and the regulations of the OTS, to the
extent legally permitted to do so, which obligations shall
survive the Transaction and shall continue in full force and
effect following the Effective Time of the Holding Company Merger
for six years, or if the Transaction does not become effective,
Crestar's obligation to indemnify and hold harmless the
Indemnified Parties shall be secondary to the obligation of AB
and Annapolis to provide indemnification as permitted under their
respective By-laws, the DGCL and the regulations of the OTS, to
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the extent legally permitted to do so, and such obligation of
Crestar shall be limited to the liabilities and claims of the
Indemnified Parties that arise in connection with the Stock
Option Agreement during the term thereof and, if the Stock Option
Agreement is exercised, shall survive the exercise therefor for a
period of six years, provided that all rights to indemnification
in respect of any claim asserted or made within such period shall
continue until the final disposition of such claim. Crestar will
provide officers and directors liability insurance coverage to
all AB and Annapolis directors and officers, whether or not they
become part of the Crestar organization after the Effective Time
of the Holding Company Merger to the same extent it is provided
to Crestar's officers and directors, provided that coverage will
not extend to acts as to which notice has been given prior to the
Effective Time of the Holding Company Merger.
Employment Agreements. Crestar Bank MD will offer
employment agreements to the following officers of AB and
Annapolis: Gilbert L. Hardesty, Allen W. Bach, David R. Chisholm,
Thomas B. Peet and Carol B. Brandt to become effective at or
after the Effective Time of the Holding Company Merger. Mr.
Hardesty has agreed to enter into his Employment Agreement
pursuant to which he will be paid a minimum of $165,000 in annual
base compensation for a three year term. Crestar Bank MD shall
establish a supplemental executive retirement plan ("SERP") under
which Mr. Hardesty shall be eligible to receive annual payments
of $70,000 for a period of 15 years. In the event of Mr.
Hardesty's death before all payments have been made to him, the
remaining SERP payments shall continue to be made to his
designated beneficiaries, or if none, to his estate. SERP
benefits shall fully vest immediately upon the execution of Mr.
Hardesty's Employment Agreement and be payable upon Mr.
Hardesty's termination of employment with Crestar Bank MD for any
reason subject to certain conditions, and the first payment shall
be made upon 30 days' notice by Mr. Hardesty or his beneficiary
to Crestar Bank MD.
If Messrs. Bach, Chisholm and Peet and Ms. Brandt continue
their employment with Crestar Bank MD for 30 days after the
Conversion Date (as defined in the Agreement) but do not accept
their respective Employment Agreements or any other employment
with Crestar or a subsidiary or affiliate of Crestar, such
employees will be entitled to the following severance amounts:
(i) an amount equal to one week's base pay for each year of
service with Annapolis, and (ii) an additional payment in an
amount of $67,500, $52,500, $25,200 and $21,200, respectively.
The severance payments shall be subject to each employee's
satisfactorily discharging his or her duties and responsibilities
and shall be paid in consideration of the employee's cooperation
with and contribution to the Transaction. Such severance
payments will be paid as soon as practicable following the end of
the 30-day period and shall be in lieu of any incentive bonus
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such employee otherwise would receive under his or her Employment
Agreement, as described below.
If Messrs. Bach, Chisholm and Peet and Ms. Brandt accept
their respective Employment Agreements with Crestar Bank MD, each
will be paid a minimum annual base salary of $95,000 for a two
year term, $75,000 for a two year term, $68,000 for a one year
term and $58,000 for a one year term, respectively. In addition,
each Employment Agreement provides that 30 days after the
Conversion Date each of Messrs. Bach, Chisholm and Peet and Ms.
Brandt will be eligible to receive an incentive bonus, subject to
each employee's satisfactorily discharging his or her duties and
responsibilities and actively contributing to the successful
implementation of the Transaction, in the amount of $22,500,
$17,500, $9,450 and $7,950, respectively.
Other than as set forth above, no director or executive
officer of AB, Annapolis, Crestar or Crestar Bank MD has any
direct or indirect material interest in the Transaction, except
in the case of directors and executive officers of AB and
Annapolis insofar as ownership of AB Common Stock and existing
options to purchase such stock might be deemed such an interest.
Effect on AB Employee Benefits Plans
At the Effective Time of the Holding Company Merger, each
holder of outstanding options to purchase AB Common Stock may
elect, by giving notice to AB prior to the Closing Date (as
defined in the Agreement), to exchange such options following the
Effective Time of the Holding Company Merger for a cash payment
(less all applicable withholding taxes) equal to the excess of
(i) the aggregate Price Per Share of the AB Common Stock
represented by the holders' options over (ii) the aggregate
exercise price of such options. Crestar, as the successor to AB
in the Holding Company Merger, agrees to make such cash payments
promptly following consummation of the Holding Company Merger.
If such options are not exchanged for cash, they will be
converted into options to purchase the number of shares of
Crestar Common Stock determined pursuant to the Exchange Ratio.
Crestar may determine to continue any of the AB or Annapolis
benefit plans for Transferred Employees in lieu of offering
participation in Crestar's benefit plans providing similar
benefits (e.g., medical and hospitalization benefits), to
terminate any of the AB or Annapolis benefit plans, or to merge
any such benefit plans with Crestar's benefit plans. Crestar
agrees that any pre-existing condition, limitation or exclusion
in its health plans shall not apply to Transferred Employees or
their covered dependents who are covered under a medical or
hospitalization indemnity plan maintained by AB or Annapolis on
the date of the Bank Merger and then change coverage to Crestar's
medical or hospitalization indemnity health plan at the time such
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Transferred Employees are first given the option to enroll in
Crestar's health plans. Except as specifically provided in the
Agreement and as otherwise prohibited by law, Transferred
Employees' service with AB and Annapolis shall be recognized as
service with Crestar for purposes of Crestar's benefit plans,
subject to applicable break-in-service rules. Crestar agrees
that immediately following the Bank Merger, all participants who
then have accounts in the Annapolis Federal Savings Bank 401(k)
Profit Sharing and Trust Plan (the "Annapolis 401(k) Plan") shall
be fully vested in their account balances. Crestar, at its
election, may continue the Annapolis 401(k) Plan for the benefit
of Transferred Employees, may merge the Annapolis 401(k) Plan
into the Crestar Employees Thrift and Profit Sharing Plan (the
"Crestar Thrift Plan"), or may cease additional benefit accruals
under and contributions to the Annapolis 401(k) Plan and continue
to hold the assets of such Plan until they are distributable in
accordance with its terms. In the event of a merger of the
Annapolis 401(k) Plan and the Crestar Thrift Plan or a cessation
of accruals and contributions under the Annapolis 401(k) Plan,
the Crestar Thrift Plan will recognize for purposes of
eligibility to participate, early retirement, and eligibility for
vesting, all Transferred Employees' service with AB and
Annapolis, subject to applicable break-in-service rules.
The Retirement Plan for Employees of Crestar and Affiliated
Corporations ("Crestar's Retirement Plan") will recognize for
purposes of vesting, eligibility to participate and eligibility
for early retirement only, all Transferred Employees' service
with AB and Annapolis, subject to applicable break-in-service
rules. Crestar also will assume the written retirement
obligations of AB and Annapolis and offer retiree health coverage
under certain pre-existing written retirement obligations of AB
and Annapolis.
Certain Federal Income Tax Consequences
The Holding Company Merger is intended to be a
reorganization under Section 368(a) of the Code, and the federal
income tax consequences summarized below are based on the
assumption that the Holding Company Merger will qualify as a
reorganization. One condition to consummation of the Holding
Company Merger is the receipt of an opinion of Hunton & Williams,
counsel to Crestar, to the effect that for federal income tax
purposes (i) the Holding Company Merger and the Bank Merger each
will be a reorganization, (ii) none of Crestar, Crestar Bank MD,
AB or Annapolis will recognize any taxable gain or loss upon
consummation of the Holding Company Merger or consummation of the
Bank Merger (but income may be recognized as a result of (a) the
termination of the bad-debt reserve maintained by Annapolis for
federal income tax purposes and (b) other possible changes in tax
accounting methods), and (iii) the Holding Company Merger will
result in the tax consequences summarized below for AB
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shareholders who receive Crestar Common Stock in exchange for AB
Common Stock pursuant to the Holding Company Merger. As
described below, the federal income tax consequences to an AB
shareholder will depend on whether the shareholder exchanges
shares of AB Common Stock for Crestar Common Stock, cash, or a
combination of Crestar Common Stock and cash and, if the
shareholder exchanges any shares of AB Common Stock for cash, on
whether certain related shareholders receive Crestar Common Stock
or cash. The following summary does not discuss all potentially
relevant federal income tax matters, consequences to any
shareholders subject to special tax treatment (for example, tax-
exempt organizations and foreign persons), or consequences to
shareholders who acquired their AB Common Stock through the
exercise of employee stock options or otherwise as compensation.
In addition, the opinion of Hunton & Williams will be based on
certain customary assumptions and representations regarding,
among other things, the lack of previous dealings between AB and
Crestar, the existing and future ownership of AB stock and
Crestar stock, and the future business plans for Crestar.
Exchange of AB Common Stock for Crestar Common Stock
An AB shareholder who receives solely Crestar Common Stock
in exchange for all his shares of AB Common Stock will not
recognize any gain or loss on the exchange. If a shareholder
receives Crestar Common Stock and cash in lieu of a fractional
share of Crestar Common Stock, the shareholder will recognize
taxable gain or loss solely with respect to such fractional share
as if the fractional share had been received and then redeemed
for the cash. A shareholder who exchanges all his shares of AB
Common Stock for Crestar Common Stock will have a tax basis in
the shares of Crestar Common Stock (including any fractional
share interest) equal to his tax basis in the shares of AB Common
Stock exchanged therefor. A shareholder's holding period for
shares of Crestar Common Stock (including any fractional share
interest) received in the Holding Company Merger will include his
holding period for the shares of AB Common Stock exchanged
therefor if they are held as a capital asset at the Effective
Time of the Holding Company Merger.
Exchange of AB Common Stock for Cash and Crestar Common Stock
An AB shareholder who receives cash for some shares of AB
Common Stock and exchanges other shares of AB Common Stock for
shares of Crestar Common Stock (including any fractional share
interest) will recognize any gain realized up to the amount of
cash received (excluding cash paid in lieu of a fractional share
of Crestar Common Stock) but will not recognize any loss. If the
shareholder holds his AB Common Stock as a capital asset at the
time of the Holding Company Merger, the amount of gain recognized
generally will be treated as capital gain unless the receipt of
cash is treated as having the effect of a dividend. If the
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recognized gain is treated as a dividend, it will be taxed as
ordinary income.
A shareholder's receipt of cash will not be treated as a
dividend if (after taking into account the constructive ownership
rules of Section 318 of the Code summarized below) the
requirements for a stock redemption to be treated as a sale of
stock under Section 302 of the Code are satisfied. Under a
Supreme Court decision (Clark v. Commissioner), to determine
whether those requirements are satisfied, a shareholder should be
treated as receiving shares of Crestar Common Stock in the
Holding Company Merger (instead of the cash actually received)
and then receiving cash from Crestar in a hypothetical redemption
of those shares. That hypothetical redemption will satisfy the
requirements under Section 302 if it (i) is "not essentially
equivalent to a dividend" within the meaning of Section 302(b)(1)
of the Code or (ii) has the effect of a "substantially
disproportionate" redemption of Crestar Common Stock within the
meaning of Section 302(b)(2) of the Code. Whether the
hypothetical redemption of shares of Crestar Common Stock will be
essentially equivalent to a dividend depends on the individual
shareholder's circumstances; to avoid dividend treatment in any
case, the hypothetical redemption must result in a "meaningful
reduction" in the percentage of Crestar Common Stock actually and
constructively owned by the shareholder (including any Crestar
Common Stock deemed received in the Holding Company Merger). The
Internal Revenue Service has indicated in a published ruling that
any reduction in percentage ownership of a publicly-held
corporation by a small minority shareholder who exercises no
control over corporate affairs constitutes a meaningful
reduction. The hypothetical redemption of shares of Crestar
Common Stock will be substantially disproportionate if the
percentage of Crestar Common Stock actually and constructively
owned by the shareholder after that redemption is less than 80%
of the percentage of Crestar Common Stock actually and
constructively owned by the shareholder (including Crestar Common
Stock deemed received in the Holding Company Merger) immediately
before the hypothetical redemption.
A shareholder's tax basis in the shares of Crestar Common
Stock (including any fractional share interest) received will
equal his tax basis in his shares of AB Common Stock exchanged
therefor, reduced by the amount of cash received (excluding cash
paid in lieu of a fractional share of Crestar Common Stock) and
increased by the amount of gain recognized (including any gain
treated as a dividend). A shareholder's holding period for
shares of Crestar Common Stock (including any fractional share
interest) received in the Holding Company Merger will include his
holding period for the shares of AB Common Stock exchanged
therefor if they are held as a capital asset at the time of the
Holding Company Merger. If a shareholder receives cash in lieu
of a fractional share of Crestar Common Stock, the shareholder
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will recognize gain or loss as if the fractional share had been
received and then redeemed for the cash.
Exchange of AB Common Stock for Cash
Any shareholder who exchanges all of his shares of AB Common
Stock for cash should consult his tax advisor to determine
whether the exchange is to be taxed as a sale of stock or whether
the cash received is to be taxed as a dividend. In addition, any
shareholder who makes an election to receive cash for all his
shares should be aware that he may, in fact, receive some Crestar
Common Stock under the proration provisions of the Agreement.
Such a holder should therefore be familiar with the rules,
described above, that apply to a holder who receives cash and
some Crestar Common Stock.
The criteria for determining the tax treatment of exchanging
all of a shareholder's shares of AB Common Stock for cash are not
certain. The Supreme Court's decision in the Clark case suggests
that an AB shareholder who receives solely cash for all his
shares of AB Common Stock should be treated as receiving shares
of Crestar Common Stock in the Holding Company Merger, rather
than the cash actually received, and then receiving cash from
Crestar in a hypothetical redemption of those shares. The
treatment of the cash received in that hypothetical redemption
then would depend first on whether the shareholder is treated as
owning any shares of Crestar Common Stock (taking into account
the constructive ownership rules of Section 318 of the Code). If
a shareholder receiving solely cash in the Holding Company Merger
does not actually or constructively own any shares of Crestar
Common Stock, the shareholder should recognize gain or loss equal
to the difference between the amount of cash received and his tax
basis in his shares of AB Common Stock surrendered in the Holding
Company Merger. Such gain or loss will be capital gain or loss
if the shares of AB Common Stock are held as a capital asset at
the time of the Holding Company Merger. If the shareholder
actually or constructively owns shares of Crestar Common Stock,
the cash received in a hypothetical redemption should result in
the recognition of gain or loss as described above unless the
redemption is treated as a dividend distribution. The redemption
should not be treated as a dividend distribution if it meets the
requirements to be (i) not essentially equivalent to a dividend
within the meaning of Section 302(b)(1) of the Code or (ii) a
substantially disproportionate redemption of Crestar Common Stock
within the meaning of Section 302(b)(2) of the Code. See the
discussion above under "Exchange of AB Common Stock for Cash and
Crestar Common Stock" for a summary of those requirements.
Despite the Clark decision, the Internal Revenue Service
might assert that the receipt of solely cash in the Holding
Company Merger is to be treated as a distribution in redemption
of the shareholder's AB Common Stock before, and separate from,
-41-
the Holding Company Merger. The Internal Revenue Service
apparently has taken such a position in private letter rulings,
which are not legal precedent, issued after the Clark decision.
Under that position, if an AB shareholder receiving solely cash
does not constructively own (within the meaning of Section 318 of
the Code) shares of AB Common Stock held by another shareholder
who exchanges such shares for Crestar Common Stock, the
shareholder receiving solely cash generally will recognize gain
or loss equal to the difference between the amount of cash
received and his tax basis in his shares of AB Common Stock.
Such gain or loss will be capital gain or loss if the shares of
AB Common Stock are held as a capital asset at the time of the
Holding Company Merger. If the AB shareholder does
constructively own shares of AB Common Stock exchanged for
Crestar Common Stock, the cash received in a hypothetical
redemption of the AB Common Stock generally will be taxable as a
dividend unless the redemption meets the requirements to be
(i) not essentially equivalent to a dividend within the meaning
of Section 302(b)(1) of the Code or (ii) a substantially
disproportionate redemption of AB Common Stock within the meaning
of Section 302(b)(2) of the Code. Those requirements would be
applied to the shareholder's actual and constructive ownership of
AB Common Stock, in contrast to the approach discussed above
where they are applied to the shareholder's actual and
constructive ownership of Crestar Common Stock.
Section 318 of the Code
Under Section 318(a) of the Code, a shareholder is treated
as owning (i) stock that the shareholder has an option or other
right to acquire, (ii) stock owned by the shareholder's spouse,
children, grandchildren, and parents, and (iii) stock owned by
certain trusts of which the shareholder is a beneficiary, any
estate of which the shareholder is a beneficiary, any partnership
or "S corporation" in which the shareholder is a partner or
shareholder, and any non-S corporation of which the shareholder
owns at least 50% in value of the stock. A shareholder that is a
partnership or S corporation, estate, trust, or non-S corporation
is treated as owning stock owned (as the case may be) by partners
or S corporation shareholders, by estate beneficiaries, by
certain trust beneficiaries, and by 50% shareholders of a non-S
corporate shareholder. Stock constructively owned by a person
generally is treated as being owned by that person for the
purpose of attributing ownership to another person. In certain
cases, a shareholder who will actually own no Crestar Common
Stock may be able to avoid application of the family attribution
rules of Section 318 of the Code by filing a timely waiver
agreement with the Internal Revenue Service pursuant to
Section 302(c)(2) of the Code and applicable regulations.
Shareholders Electing to Exercise Their Right of Appraisal
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The receipt of cash for shares of AB Common Stock pursuant
to the exercise of the right to an appraisal will be a taxable
transaction. Any shareholder considering the exercise of such
right should consult his tax advisor about the tax consequences
of receiving cash for his shares.
The preceding discussion summarizes for general information
the material federal income tax consequences of the Holding
Company Merger to AB shareholders. The tax consequences to any
particular shareholder may depend on the shareholder's
circumstances. AB shareholders are urged to consult their own
tax advisors with regard to federal, state, and local tax
consequences.
Rights of Shareholders Electing to Exercise Their Right of
Appraisal
Under Delaware law, each AB shareholder is entitled to
demand and receive payment of the fair value of his shares of AB
Common Stock pursuant to Section 262 of the DGCL, as to all, but
not less than all, shares of AB Common Stock beneficially owned
by him, and, if the Holding Company Merger is consummated, to
receive cash from Crestar equal to the fair value of such shares
determined as of immediately prior to the Transaction. Any
shareholder who elects to perfect his right to an appraisal and
demands payment of the fair value of his shares of AB Common
Stock must strictly comply with Section 262 of the DGCL, a copy
of which is attached hereto as Annex IV. To perfect the right to
an appraisal, the shareholder must not vote for the Transaction
or even return an executed proxy that is otherwise left blank.
At the Effective Time of the Holding Company Merger, the
shares of AB held by a shareholder exercising the right to an
appraisal will be canceled, and such shareholder will be entitled
to no further rights except the right to receive payment of the
fair value of his shares of AB Common Stock. However, if such
shareholder fails to perfect or withdraws or loses his right to
an appraisal of his shares of AB Common Stock, his shares of AB
Common Stock will be exchanged for Crestar Common Stock as
provided in the Holding Company Plan of Merger.
THE BOARD OF DIRECTORS OF AB UNANIMOUSLY RECOMMENDS A VOTE
FOR THE HOLDING COMPANY MERGER.
BUSINESS OF CRESTAR
Crestar is the holding company for Crestar Bank of Virginia,
Crestar Bank N.A. of Washington, D.C. and Crestar Bank MD of
Maryland. At December 31, 1993, Crestar had approximately
$13.3 billion in total assets, $10.2 billion in total deposits
and $1.1 billion in total shareholders' equity.
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In 1963, six Virginia banks combined to form United Virginia
Bankshares Incorporated ("UVB"), a bank holding company formed
under the Bank Holding Company Act of 1956 (the "BHCA"). UVB
(parent company of United Virginia Bank) extended its operations
into the District of Columbia by acquiring NS&T Bank, N.A. on
December 27, 1985 and into Maryland by acquiring Bank of Bethesda
on April 1, 1986. On September 1, 1987, UVB became Crestar
Financial Corporation and its bank subsidiaries adopted their
present names. Since 1990 Crestar has acquired nine banks and
thrifts in Virginia, Maryland and Washington, D.C.
Crestar serves customers through a network of 302 banking
offices and 254 automated teller machines (as of December 31,
1993). Crestar's subsidiary banks (the "Bank Subsidiaries")
offer a broad range of banking services, including various types
of deposit accounts and instruments, commercial and consumer
loans, trust and investment management services, bank credit
cards and international banking services. Crestar's subsidiary,
Crestar Insurance Agency, Inc., offers a variety of personal and
business insurance products. Securities brokerage and investment
banking services are offered by Crestar's subsidiary, Crestar
Securities Corporation. Mortgage loan origination, servicing and
wholesale lending are offered by Crestar Mortgage Corporation,
and investment advisory services are offered by Capitoline
Investment Services Incorporated, both of which are subsidiaries
of Crestar Bank of Virginia. These various Crestar subsidiaries
provide banking and non-banking services throughout Virginia,
Maryland and Washington, D.C., as well as certain non-banking
services to customers in other states.
The executive offices of Crestar are located in Richmond,
Virginia at Crestar Center, 919 East Main Street. Crestar's
Operations Center is located in Richmond. Regional headquarters
are located in Norfolk and Roanoke, Virginia and in Washington,
D.C.
Recent Developments
Completed Acquisitions. On January 28, 1994, Crestar
acquired Virginia Federal Savings Bank, headquartered in
Richmond, Virginia. Approximately $584 million in deposits, $554
million in loans and 10 branches were initially added to
Crestar's existing branch network. Crestar paid approximately
$52 million in cash in the transaction.
On January 10, 1994, Crestar acquired Mortgage Capital
Corporation, a privately held wholesale mortgage production
company based in St. Paul, Minnesota with approximately $13
million in total assets.
On June 25, 1993, Crestar acquired from the FDIC
approximately $21 million in deposits of City National Bank of
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Washington, a one-branch institution closed by the Office of the
Comptroller of the Currency ("OCC").
On May 14, 1993, Crestar acquired CFS Financial Corporation,
the holding company for Continental Federal Savings Bank,
headquartered in Fairfax, Virginia. Approximately $650 million
in deposits, $630 million in loans and 19 branches were initially
added to Crestar's network. Crestar issued approximately 1.4
million shares of Crestar Common Stock and made cash payments of
approximately $6.5 million in the transaction, which was valued
at over $60 million.
Pending Acquisitions. On September 22, 1993, Crestar
entered into an agreement to acquire Providence Savings and Loan
Association, F.A. ("Providence") headquartered in northern
Virginia. This acquisition would initially add approximately
$325 million in deposits, $270 million in loans and 12 branches
to Crestar's existing branch network. Crestar would pay
approximately $27 million in cash in the transaction. The
Providence transaction is expected to close in mid-March 1994.
In November, 1993, Crestar Bank, NVR Federal Savings Bank
("NVR"), headquartered in McLean, Virginia and NVR Financial
Services, Inc., entered into an agreement pursuant to which
Crestar Bank will acquire substantially all of the assets and
assume certain liabilities of NVR. Crestar Bank would pay
approximately $47.7 million in cash in the transaction. The NVR
transaction is expected to close in mid-March 1994.
BUSINESS OF AB
AB and Annapolis
AB is a unitary savings and loan holding company
incorporated under the laws of the State of Delaware on August 6,
1986. AB's principal business is conducted through its wholly-
owned subsidiary, Annapolis (formerly Annapolis Federal Savings
and Loan Association), which began operations in 1925 as a
federally chartered mutual savings and loan association. AB
acquired Annapolis at the time Annapolis converted from mutual to
stock form through a voluntary supervisory conversion in December
1986 (the "Conversion"). Other than the stock of Annapolis, AB
currently does not have any material assets. AB and Annapolis
are subject to regulation by the OTS as well certain regulatory
reporting requirements.
At September 30, 1993, AB had total consolidated assets of
$325.0 million, total consolidated deposits of $288.1 million and
total consolidated shareholders' equity of $10.5 million.
Annapolis' savings accounts are insured up to applicable limits
by the Savings Association Insurance Fund ("SAIF") of the FDIC.
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AB and Annapolis maintain their principal office at 147 Old
Solomons Island Road, Annapolis, Maryland 21401, and the
telephone number is (410) 224-6800. Annapolis serves the
Annapolis area, principally Anne Arundel and Prince George's
Counties, through eight full service banking offices in Historic
Annapolis, Parole Center, Jennifer Road (Annapolis), Severna
Park, Clinton, Ft. Washington, Bowie and Laurel. Annapolis has
additional full service banking offices in Waldorf and Lexington
Park. All of the offices of Annapolis emphasize community
orientation.
Annapolis' primary business is the solicitation of savings
accounts from the general public and the origination of mortgage
loans, mostly upon the security of single-family residences and
other improved real estate located within the State of Maryland.
FNB Loan
At the time of the Conversion, AB purchased 100% of the
outstanding shares of Annapolis (100 shares, $1.00 par value) for
$10 million. AB financed the acquisition by a cash equity
contribution of AB's directors in the amount of $2.5 million and
a loan from FNB in the principal amount of $7.5 million. The
loan is secured by the shares of Annapolis' stock owned by AB.
On December 28, 1989, AB borrowed an additional $3 million from
FNB as a short term credit facility. The proceeds of that loan
were used to fund a capital contribution to Annapolis. These two
loans were modified and consolidated in October 1990.
In September 1993, AB entered into an Amended and Restated
Loan Agreement (the "Loan Agreement") with FNB which further
modified the terms of AB's outstanding indebtedness to FNB in the
amount of $7.3 million. Under the Loan Agreement, interest is
payable on the outstanding principal balance at the fixed rate of
7.77% per annum. Quarterly principal and interest payments in
the amount of $185,000 are due in August, November, February and
May during the term of the loan, which matures on May 28, 1999.
Upon maturity, AB must pay to FNB a loan fee in the amount of $1
million, subject to reduction as discussed below. In addition,
principal curtailments on the loan must be made on June 30, 1994
in the amount of either (a) $3 million or (b) $2 million with an
additional principal curtailment in the amount of $1 million on
June 30, 1995. The amount of the curtailment paid by AB will
determine the amount by which the $1 million loan fee is reduced.
The Loan Agreement prohibits AB from paying any dividends to
its shareholders at any time AB is in default under the Loan
Agreement and further limits dividends to an amount between
$75,000 and $300,000 per year depending on the principal amount
of the FNB Loan then outstanding. The Loan Agreement contains
other restrictions on the business of AB and Annapolis, including
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prohibitions against sales of assets, formation of subsidiaries,
acquisitions of third parties and mergers.
Crestar has agreed, as part of the Holding Company Merger,
to repay the FNB Loan in full on or prior to the Effective Time
of the Holding Company Merger. If the Holding Company Merger
does not close by June 15, 1994, Crestar will extend a loan to
AB, on substantially the same terms as the FNB Loan, to enable AB
to repay the FNB Loan in full.
Market Area
Annapolis' primary market areas are in Anne Arundel and
Prince George's Counties. Eight branches are located in these
two counties, in addition to one branch each in Charles and St.
Mary's Counties. The market area comprising Anne Arundel and
Prince George's Counties has a population of approximately
1,170,000 and consists of a diversified industrial and service
economic base. In addition, Annapolis, as the state capital, has
a high proportion of government employees and supporting
businesses. This contributes significantly to the area's stable
growth and resistance to cyclical variations.
Lending Activities
The principal lending activities of Annapolis have
historically consisted of the origination of permanent loans on
residential real estate and, to a lesser degree, on commercial
property. Annapolis also makes home improvement loans, consumer
loans, student loans and other loans.
Annapolis has engaged, from time to time, in purchasing
loans and loan participations in the secondary market. Annapolis
also invests in various federal and government agency obligations
and other investment securities permitted by applicable laws and
regulations, including mortgage-backed pass-through securities.
The principal sources of funds for Annapolis' lending
activities include deposits received from the general public,
amortization and prepayment of loans, sale of loans and
borrowing.
Annapolis' primary sources of income are interest and
origination fees on loans and interest on investment securities.
Annapolis' principal expenses are interest paid on deposit
accounts and borrowings and overhead expenses incurred in the
operation of Annapolis.
The operations and profitability of Annapolis are affected,
to a large extent, by the national economy, changing interest
rates and the local economy in Annapolis' primary market.
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Income From Lending Activities
At the present time Annapolis' lending activities are in
four principal areas: conventional mortgage loans on residential
properties, construction loans on residential properties,
commercial loans, and consumer loans.
Mortgage Loans. The types of conventional mortgage loans
primarily offered by Annapolis are adjustable and fixed rate
conventional and bi-weekly mortgage loans and, on a limited
basis, balloon mortgage loans ("BMLs"). There is no negative
amortization on any mortgage type currently offered.
With adjustable rate mortgage loans, interest rates and
monthly payments are adjusted semi-annually, annually or
triennially based on the movement of a predetermined index.
Annapolis currently uses as its index the corresponding United
States Treasury constant maturities rate, which is published
weekly by the United States Treasury Department. Rate
adjustments are limited to 2% on loans which adjust annually or
triennially. Total lifetime increases are currently limited to
5% or 6% depending on loan type. Monthly payments are adjusted
to reflect interest rate changes.
A BML is a loan with either a fixed or adjustable rate and a
usual term of three to five years amortized over a 10- to 30-year
period. When such a loan becomes due, it is repaid, renewed, or
converted to another type of mortgage loan. If the borrower
chooses to renew or convert this loan, the borrower may do so at
the then current lending rates and terms. Annapolis does not
utilize BMLs on a regular basis in residential lending. BMLs
currently being offered are on residential building lots or on
commercial properties.
Fixed-rate, fixed-term loans are mortgage loans which are
written in anticipation of their resale in the secondary market.
Annapolis originates conventional mortgage loans for the
purchase of one- to four-family dwelling units. The maximum
loan-to-value ratio for owner-occupied dwellings is 95%. All
loans with a loan-to-value ratio in excess of 80% require private
mortgage insurance. Second mortgage loans are available for
general purposes secured by single-family owner-occupied real
estate located within Annapolis' primary lending area with a
current loan-to-value ratio not to exceed 80%.
Annapolis is an approved lender under the Farmers Home
Administration, the Federal Housing Administration and Veterans
Administration mortgage programs.
Annapolis' conventional mortgage loans are offered at
competitive rates at amortization terms of up to 30 years.
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Escrow accounts normally are required on all loans for real
estate taxes. Monthly payments include required escrow accounts.
Consumer Loans. The principal types of consumer loans made
by Annapolis include education, home improvement, home equipment
and furnishings, automobile, boat and personal loans including
personal lines of credit. Annapolis offers both open-end and
closed-end home equity loan programs. Automobile, boat and
personal loans are usually collateralized and may carry credit
insurance. An overdraft checking loan program is also available.
Consumer loan payments are made on a monthly basis. The
repayment period on consumer loans generally ranges from one to
five years with longer terms available for certain types of
loans.
Commercial Loans. Commercial loans are available for
business purposes. The principal type of commercial loan made by
Annapolis is secured by real estate. Individual personal
guarantees may also be required as additional security. These
loans usually are written for comparatively short terms with
periodic interest rate adjustments made during the term of the
loan. Monthly repayments normally are required, but other terms
may be negotiated.
Primary Lending Area. Annapolis' primary lending area is
located within the State of Maryland and is concentrated in the
Maryland counties of Anne Arundel and Prince George's.
Loan Originations. Mortgage and consumer loans come from a
number of sources including depositors, current borrowers, walk-
in customers, advertisement, referrals by real estate brokers and
builders, correspondents and direct solicitation. Commercial
loans are obtained by direct solicitation, referrals,
advertisement and walk-in customers.
Annapolis believes that it has maintained a conservative
posture with regard to the loan amount in relation to the
appraised value of any particular property. In recent years,
residential loans originated by Annapolis generally have been at
levels less than 80% of the appraised value of the properties.
Some privately insured loans are made in excess of 80% of value.
Loans made by Annapolis on multi-family and commercial
properties, in general have had a loan-to-value ratio below 80%.
Contractual loan payment periods for residential and
commercial real estate loans originated by Annapolis normally
range from 15 to 30 years. Because residential borrowers may
refinance or prepay their loans, however, such loans normally
remain outstanding for a substantially shorter period of time.
Experience during recent years has indicated that, because of
prepayments in connection with refinancing and sales of property,
residential loans remain outstanding, on average, for less than
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ten years. Commercial real estate loans are typically written
with call options of 5 years or less.
Annapolis' fixed-rate first mortgages include "due-on-sale"
clauses, which give Annapolis the right to declare a loan
immediately due and payable upon the sale or certain other
transfers of the mortgaged property. Most of Annapolis'
adjustable rate first mortgages are assumable upon approval by
Annapolis. Due-on-sale clauses are an important means of
limiting the life of existing fixed-rate mortgage loans. By
regulation, the OTS has preempted state prohibitions on the
exercise of due-on-sale clauses by all OTS-regulated lenders,
which includes Annapolis.
Annapolis' primary lending activity has been the origination
of loans for its own account and the sale of loans to others.
Annapolis also has purchased loans from others.
Annapolis originates mortgage loans in its main office and
its full service branches.
Loan Processing. All of Annapolis' mortgage lending is
subject to the loan origination procedures prescribed by the
Board of Directors. All property securing real estate loans made
by Annapolis is appraised by independent fee appraisers. Each
approved loan application must contain an appraisal as of a date
not more than six months prior to the application date and, in
connection with loans on new property, the appraisal is subject
to a reconfirmation of value of the completed property. Detailed
loan applications are obtained to determine the borrower's
ability to repay the loan, the viability of the loan and the
adequacy of the value of the property that will secure the loan.
The more significant items on these applications are verified
through the use of credit reports, financial statements and
confirmations. The applications, appraisals and other items then
are reviewed by Annapolis' loan officers, Loan Committee or Board
of Directors, depending upon the size and type of loan, applying
the underwriting standards established by the Board of Directors.
Loans ranging in size up to $250,000 can be approved by
designated loan officers; loans up to $1,500,000 can be approved
by the Loan Committee. Loans above such amount must be approved
by Annapolis' Board of Directors.
Annapolis promptly notifies mortgage loan applicants of its
decision. If the loan is approved, the terms and conditions are
indicated and include the loan amount, interest rate,
amortization term, a brief description of the mortgaged property
and the requirements for fire and casualty insurance. The
borrower has the right to select his own insurance broker or
agent. The borrower is required to pay all closing costs of
Annapolis' as well as his own costs.
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Consumer loan borrowers are notified of approval orally
followed by a written confirmation of the terms and conditions.
Commercial loan approvals usually are given verbally followed by
a written confirmation of the terms and conditions upon which the
loan will be made.
It is Annapolis' policy to obtain title insurance policies
certifying or insuring that Annapolis has the required valid lien
on the mortgaged real estate. Borrowers must also obtain hazard
insurance policies prior to closing and flood insurance must be
obtained when required by federal regulations. Borrowers may be
required to advance funds on a monthly basis together with each
payment of principal and interest to a mortgage loan escrow
account, from which Annapolis makes disbursements for items such
as real estate taxes and private mortgage insurance premiums.
Purchase and Sale of Loans. Annapolis' residential loan
strategy is to originate loans which are saleable in the
secondary mortgage market. Generally, Annapolis will sell all
30-year, fixed-rate new loan originations for risk management
purposes. At the present time, Annapolis holds for investment
adjustable rate and fifteen-year, fixed-rate residential real
estate loans.
Loan sales are made on a yield basis with the difference
between the yield to the purchase and the amount paid by the
borrower constituting a gain or loss to Annapolis. The sale of
loans and loan participations will generally be made on a non-
recourse basis.
Loan Commitments. Annapolis had approximately $2.3 million
in outstanding loan commitments and approximately $14.1 million
in unused lines of credit at September 30, 1993, all of which
will expire within one year. Annapolis also had commitments to
sell 30-year, fixed-rate mortgage loans of $5.9 million.
Annapolis uses the same credit policies in making commitments and
conditional obligations as it does for originating loans.
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Analysis of Loan Portfolio. Set forth below is selected
data relating to the composition of Annapolis' loan portfolio by
type of loan and type of security on the dates indicated (dollars
are stated in thousands):
<TABLE>
At September 30,
1993 1992 1991 1990 1989
TYPE OF LOAN AND
SECURITY $ % $ % $ % $ % $ %
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
LOANS SECURED BY
PERMANENT MORTGAGES:
Residential:
1-4 dwelling units:
First mortgages
and closed-end
junior liens $101,873 47.17% $105,258 44.15% $112,049 42.66% $123,293 44.61% $148,398 50.55%
Revolving, open-end
loans 6,996 3.24 8,655 3.63 10,128 3.86 9,867 3.57 9,015 3.07
5 or more dwelling
units 2,339 1.08 5,307 2.23 6,474 2.46 6,867 2.48 7,862 2.68
Nonresidential and
land 72,830 33.72 76,698 32.17 48,930 18.63 49,916 18.06 49,189 16.76
Construction loans:
1-4 dwelling units 13,862 6.42 22,599 9.48 47,624 18.13 50,599 18.31 36,791 12.53
5 or more dwelling
units 0 0.00 0 0.00 0 0.00 0 0.00 2,539 0.86
Nonresidential 635 0.29 1,494 0.63 11,386 4.33 8,022 2.90 9,987 3.40
COMMERCIAL LOANS:
Secured other than
mortgage 13,078 6.06 15,049 6.31 18,286 6.96 13,865 5.02 17,151 5.84
Unsecured 3,177 1.47 4,227 1.77 4,897 1.86 7,920 2.87 5,947 2.03
CONSUMER LOANS:
Loans on deposits 1,258 0.58 1,281 0.54 2,297 0.87 3,139 1.14 3,072 1.05
Other consumer loans 8,322 3.85 10,370 4.35 14,581 5.55 16,221 5.87 18,346 6.25
Total loans, gross 224,370 103.89 250,938 105.25 276,652 105.33 289,709 104.83 308,297 105.01
Less:
Undisbursed portion
of loans in process (4,239) (1.96) (8,140) (3.41) (11,567) (4.40) (10,309) (3.73) (12,923) (4.40)
Allowance for loan
losses (2,901) (1.34) (3,200) (1.34) (1,205) (0.46) (1,742) (0.63) (579) (0.20)
Deferred loan fees (1,255) (0.58) (1,173) (0.49) (1,218) (0.46) (1,287) (0.47) (1,219) (0.42)
Total loans (net) $215,975 100.00% $238,425 100.00% $262,662 100.00% $276,371 100.00% $293,576 100.00%
</TABLE>
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The following table sets forth certain information at
September 30, 1993 regarding the dollar amount of loans maturing
in Annapolis' portfolio based on contractual term to maturity.
Demand loans, loans having no stated schedule of repayments, and
no stated maturity, and overdrafts are reported as due in one
year or less (dollars are stated in thousands):
Mortgage Other
Loans Loans Total
Amounts due:
Within 1 year $ 56,757 $21,432 $ 78,189
After 1 year:
1 to 3 years 21,638 2,759 24,397
3 to 5 years 25,148 968 26,116
5 to 10 years 25,666 571 26,237
10 to 20 years 38,925 94 39,019
Over 20 years 30,412 0 30,412
Total due after 1 year 141,789 4,392 146,181
Total amounts due $198,546 $25,824 224,370
Add (less):
Undisbursed portion of loans in process (4,239)
Allowance for loan losses (2,901)
Deferred loan fees (1,255)
Loans receivable, net $215,975
The following table sets forth the dollar amount of all
loans due after September 30, 1994 which have predetermined
interest rates and which are floating or adjustable interest
rates (dollars are stated in thousands):
Pre-Determined Floating or
Rates ARM
Real Estate Mortgage Loans $39,952 $101,837
Other Loans 2,487 1,905
Loan Fees and Service Charges. In addition to earning
interest on loans, Annapolis also receives income from, among
other sources; loan fees, service charges on deposit accounts and
fees related to late payment, loan servicing activities and
miscellaneous other activities related to loans. Income from
these activities varies from period to period with the volume and
type of loans made.
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Annapolis receives loan fees for originating mortgage loans.
Loan fees are a percentage of the principal amount of the
mortgage loan and are charged to the borrower for creation of the
loan. These fees are generally a percentage of the principal
amount of residential mortgages. Loan origination fees and
direct loan origination costs relating to successful loan
origination efforts are deferred and recognized over the life of
the loans as a yield adjustment.
The following table details loan fees, and loan fees as a
percentage of loans originated and purchased by Annapolis and as
a percentage of interest income on loans for the periods
indicated. In addition, total deferred loan origination fees at
the end of the periods indicated also are presented (dollars are
stated in thousands):
Year Ended September 30,
1993 1992 1991
Loan fees $1,216 $1,448 $1,390
Loan fees as a % of
loans originated 2.59% 2.13% 2.09%
Loan fees as a % of
interest income on
loans 6.06% 6.07% 4.83%
Deferred loan
origination fees
at the end
of the period $1,255 $1,173 $1,218
Nonperforming Assets, Loan Delinquencies and Defaults
When a mortgage loan borrower fails to make a required
payment on a loan, Annapolis attempts to cure the deficiency by
contacting the borrower. Printed delinquency notices are sent
after 15 days past due and direct contacts are made after a
payment is more than 30 days past due, and in many cases in less
than 30 days. In most cases deficiencies are cured promptly. If
deficiencies are not cured within 90 days, or satisfactory
arrangements to cure the delinquency are not made, then Annapolis
will institute measures to foreclose the mortgage. Periodic
inspections of the property are made to determine the status of
the collateral. If foreclosed, the property will be sold at a
public sale, and usually is purchased by Annapolis subject to
redemption rights of the borrower. Because these redemption
rights may extend for periods of from 6 to 12 months, an effort
may be made to obtain the property much sooner through a deed in
lieu of foreclosure. Property acquired by Annapolis through
foreclosure or deed in lieu of foreclosure is classified as "Real
Estate Owned" until it is sold or otherwise disposed.
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Consumer and commercial loan borrowers who fail to make
payments are contacted to cure the delinquency and in most cases
the delinquency is quickly corrected. Delinquency notices are
sent after the payment is 15 days past due and direct contact is
made before the payment is 30 days past due. If after 90 days
the delinquency is not corrected or arrangement to correct the
deficiency is not made, Annapolis initiates action to obtain the
collateral or collect the debt through the remedies available.
Collateral obtained as a result of loan default is retained by
Annapolis as an asset until sold or otherwise disposed.
All loans over 90 days past due are placed into a non-
accrual status.
Nonaccrual loans totaled $4.6 million, $8.5 million and $3.5
million at September 30, 1993, 1992 and 1991, respectively.
Interest income not recognized on these loans totaled
approximately $286,000, $580,000 and $154,000 for the years ended
September 30, 1993, 1992 and 1991 respectively.
The following table presents information on nonperforming
loans, nonaccruing loans that are 90 days or more past due and
real estate owned (dollars are stated in thousands):
At September 30,
1993 1992 1991 1990 1989
Total loans
delinquent 90
days or more:
Mortgage loans $ 3,614 $ 5,879 $ 4,671 $ 6,008 $ 2,612
Other loans 1,006 2,647 1,891 1,084 498
Total
nonperforming
loans 4,620 8,526 6,562 7,092 3,110
Repossessed
assets 10,618 14,183 4,844 3,103 621
Total
nonperforming
assets $15,238 $22,709 $11,406 $10,195 $ 3,731
Nonperforming
assets to
total assets 4.70% 6.44% 3.06% 2.67% 0.96%
Loans delinquent
90 days or
more to total
loans 2.06% 3.40% 2.37% 2.45% 1.01%
Asset Classification
OTS regulations require that each insured institution
classify its own assets on a regular basis. In addition, in
-56-
connection with examinations of insured institutions, OTS and
FDIC examiners have authority to identify problem assets, and, if
appropriate, classify them. If an institution does not agree
with an examiner's classification of an asset it may appeal this
determination to the examining agency. Problem assets may be
classified as "substandard," "doubtful" or "loss." There is also
a "special mention" category, which includes assets which do not
currently expose an insured institution to a sufficient degree of
risk to warrant classification, but which do possess credit
deficiencies or potential weaknesses deserving management's close
attention. Assets classified as substandard or doubtful require
the institution to establish general allowances for loan losses.
If an asset or portion thereof is classified loss, then an
insured institution must either establish specific allowances for
loan losses in the amount of 100% of the portion of the asset
classified loss, or charge off such amount. At September 30,
1993, Annapolis held approximately $15,948,000 in assets
classified as substandard and $150,000 in assets classified as
doubtful. Total classified assets at September 30, 1993
represented 4.97% of Annapolis' total assets. At the same date,
approximately $8,329,000 were special mention assets.
Allowance for Loan Losses
As a lender Annapolis realizes that credit losses will be
experienced and that the risk of loss will vary with, among other
things, the type of loan being made, the creditworthiness of the
borrower over the term of the loan and in the case of a secured
loan, the quality of the security for the loan. See "-- Lending
Activities."
Management closely follows and analyzes delinquency trends
on loans and recognizes the fact that loan credit losses may be
experienced. While management uses available information to
recognize losses on loans, future additions to the allowance may
be necessary based on changes in economic conditions. In
addition, various regulatory agencies, as an integral part of
their examinations process, periodically review Annapolis'
allowance for loan losses. Such agencies may recommend that
Annapolis recognize additions to the allowance based on their
judgments of information available to them at the time of their
examinations.
Annapolis' lending policies are established and
periodically reviewed by its Board of Directors and are also
subject to the regulations of the OTS. See "-- Regulatory
Matters."
-57-
The following table sets forth an analysis of activity in
the allowance for loan losses accounts (dollars are stated in
thousands):
<TABLE>
Year Ended September 30,
1993 1992 1991 1990 1989
<S> <C> <C> <C> <C> <C>
Balance at beginning of period $ 3,200 $ 1,205 $ 1,742 $ 579 $ 728
Provision for loan losses 156 5,931 230 1,287 269
Charge-offs:
Mortgage loans (187) (3,318) (570) - -
Other loans (424) (666) (232) (154) (483)
Recoveries:
Mortgage loans 65 - - - -
Other loans 91 48 35 30 65
Balance at end of period $ 2,901 $ 3,200 $ 1,205 $ 1,742 $ 579
Balance at end of period applicable to:
Mortgage loans $ 2,837 $ 2,862 $ 678 $ 1,043 $ 200
Other loans 64 338 527 699 379
Total $ 2,901 $ 3,200 $ 1,205 $ 1,742 $ 579
Ratio of allowance for loan
losses to total loans receivable
at the end of the period 1.29% 1.28% 0.44% 0.60% 0.19%
Ratio of allowance for loan
losses to loans delinquent 90
days or more 62.79% 37.53% 18.36% 24.56% 18.62%
Ratio of allowance for loan
losses to nonperforming assets 19.04% 14.09% 10.56% 17.09% 15.52%
Ratio of net charge-offs to average
loans during the period 0.20% 1.53% 0.28% 0.04% 0.14%
</TABLE>
Investments
Interest and dividends on investments historically have
provided Annapolis with an additional source of income. At
September 30, 1993, the market value of investment securities,
consisting primarily of mortgage-related securities and U.S.
Government securities, aggregated approximately $67.0 million,
with an amortized principal cost of approximately $65.5 million.
As a member of The Federal Home Loan Bank of Atlanta
("FHLB-Atlanta"), Annapolis is required to maintain liquid assets
-58-
at minimum levels which are adjusted by the OTS from time to
time. Annapolis generally has maintained a level of liquidity
above that required by federal regulations. In addition to
providing for liquidity, Annapolis maintains investments to earn
a return on funds not currently required for its various lending
activities. See "AB Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and
Capital Resources" and "-- Regulatory Matters -- Liquidity
Requirements."
Annapolis' investment objectives are to promote long-term
profitability, maintain regulatory liquidity, meet pledging
requirements, and protect the value of its assets. Investment
decisions are normally made jointly by Annapolis' President and
Chief Financial Officer as directed by policies adopted by the
Investment Committee of the Board of Directors and ratified by
the Board of Directors.
The following table sets forth a comparative summary of the
components of Annapolis' investment securities portfolio at the
dates indicated (dollars are stated in thousands):
<TABLE>
Estimated
Amortized Market
Cost Value
<S> <C> <C>
September 30, 1993:
U.S. government and agency obligations $22,464 $22,779
Mortgage-backed securities 32,716 33,836
Collateralized mortgage obligations 8,004 8,061
Marketable equity securities - -
Other investments - -
Federal Home Loan Bank Stock 2,280 2,280
$65,464 $66,956
September 30, 1992:
U.S. government and agency obligations $13,546 $14,086
Mortgage-backed securities 42,156 43,898
Collateralized mortgage obligations 1,031 1,058
Marketable equity securities - -
Other investments - -
Federal Home Loan Bank Stock 2,280 2,280
$59,013 $61,322
September 30, 1991:
U.S. government and agency obligations $17,485 $17,556
Mortgage-backed securities 48,056 48,954
Collateralized mortgage obligations 1,798 2,077
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Marketable equity securities 4,267 4,267
Other investments 300 297
Federal Home Loan Bank Stock 2,280 2,280
$74,186 $75,431
</TABLE>
-60-
The following table sets forth the maturities, carrying
values and weighted average yields of the components of
Annapolis' investment portfolio at September 30, 1993 (dollars
are stated in thousands):
<TABLE>
After One Through After Five Through
One Year or Less Five Years Ten Years After Ten Years Total
Weighted Weighted Weighted Weighted Weighted
Carrying Average Carrying Average Carrying Average Carrying Average Carrying Market Average
Value Yield Value Yield Value Yield Value Yield Value Value Yield
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. government
and agency
obligations $17,429 4.18% $5,035 6.36% $ - - % $ - - % $22,464 $22,779 4.67%
Mortgage-backed
securities - - 3,409 7.76 9,992 6.83 19,315 7.51 32,716 33,836 7.33
Collateralized
mortgage
obligations - - 5,993 5.55 2,011 5.85 - - 8,004 8,061 5.63
Other investments - - - - - - - - - - -
Federal Home Loan
Bank Stock - - - - - - 2,280 5.00 2,280 2,280 5.00
$17,429 4.18% $14,437 6.35% $12,003 6.67% $21,595 7.24% $65,464 $66,956 6.13%
</TABLE>
Annapolis' investment securities portfolio at September 30,
1993 contained neither tax-exempt securities nor securities of
any issuer with an aggregate book value in excess of 10% of
Annapolis' retained earnings, excluding those issued by the
United States Government, or its agencies. Annapolis' investment
securities portfolio also contained no corporate securities rated
below investment grade as of that date.
Deposit Activities
Deposits are attracted principally from within Annapolis'
primary market area through the offering of a selection of
deposit instruments including regular savings accounts, term
certificate accounts, NOW accounts and money market deposit
accounts. Jumbo certificate accounts in excess of $100,000 are
not actively solicited by Annapolis, which generally does not pay
above market rates on these accounts. Deposit account terms
vary, the principal differences being the minimum balance
required, the frequency of compounding interest, the time period
that the funds must remain on deposit and the interest rate.
Annapolis does not obtain funds through brokered deposits, nor
does it actively solicit funds outside its primary market area.
Annapolis does not generally negotiate with its customers
with respect to deposit interest rates. The interest rates it
offers are evaluated and set on a weekly basis after considering
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rates offered by competition in its market area, the cash needs
of Annapolis, economic conditions including loan demand, and
national economic trends.
-62-
Deposit Portfolio. The following table sets forth as of
the dates indicated Annapolis' deposit accounts by the type of
account offered (dollars are stated in thousands):
<TABLE>
At September 30,
1993 1992 1991
Percent Weighted Percent Weighted Percent Weighted
of Total Average of Total Average of Total Average
Amount Deposits Rate Amount Deposits Rate Amount Deposits Rate
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Non-certificate
accounts:
Non-interest-bearing
deposit accounts $ 9,229 3.20% - % $ 9,661 3.11% - % $ 7,642 2.38% - %
NOW accounts 24,704 8.58 2.83 23,543 7.58 3.30 20,763 6.47 5.16
Money market
deposit accounts 16,844 5.85 2.90 18,806 6.05 3.30 19,958 6.21 5.01
Passbook and
statement
accounts 92,651 32.16 3.24 80,128 25.79 3.91 52,651 16.40 5.28
Total non-certificate
accounts 143,428 49.79 2.92 132,138 42.53 3.43 101,014 31.46 4.80
Certificate accounts:
Term certificate
accounts 130,641 45.35 4.97 153,609 49.44 5.99 181,746 56.60 7.16
$100,000 and over
negotiated rate
certificate
accounts 14,008 4.86 3.42 24,964 8.03 4.47 38,348 11.94 6.69
Total certificate
accounts 144,649 50.21 4.82 178,573 57.47 5.78 220,094 68.54 7.08
Total deposits $288,077 100.00% 3.87 $310,711 100.00% 4.78 $321,108 100.00% 6.36
</TABLE>
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Deposit Flow. The following table sets forth changes in the dollar
amount of deposits in the various types of accounts offered by Annapolis
between the dates indicated (dollars are stated in thousands):
<TABLE>
At Sep. 30 % Increase At Sep. 30 % Increase At Sep. 30 %
1993 Deposits (Decrease) 1992 Deposits (Decrease) 1991 Deposits
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Non-interest
bearing accounts $ 9,229 3.20% $ (432) $ 9,661 3.11% $ 2,019 $ 7,642 2.38%
NOW accounts 24,704 8.58 1,161 23,543 7.58 2,780 20,763 6.47
Money market
deposit accounts 16,844 5.85 (1,962) 18,806 6.05 (1,152) 19,958 6.21
Passbook and
statement accounts 92,651 32.16 12,523 80,128 25.79 27,477 52,651 16.40
Certificate accounts 144,649 50.21 (33,924) 178,573 57.47 (41,521) 220,094 68.54
</TABLE>
Costs of Deposits. The following table sets forth the
average balances and costs of Annapolis' deposit accounts for the
years indicated (dollars are stated in thousands):
<TABLE>
Year Ended September 30,
1993 1992 1991
Average Average Average Average Average Average
Balance Interest Cost Balance Interest Cost Balance Interest Cost
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Transaction and
Money Market
deposit
accounts $ 52,466 $ 1,249 2.38% $ 52,140 $ 1,769 3.39% $ 49,145 $ 2,249 4.58%
Passbook and
Certificate
accounts 245,062 11,126 4.54 266,089 15,899 5.98 274,960 20,575 7.48
Total $297,528 $12,375 4.16 $318,229 $17,668 5.55 $324,105 $22,824 7.04
</TABLE>
Time Deposit Maturities. The following table sets forth
the scheduled maturities and weighted average rates of Annapolis'
certificate accounts as of the dates stated (dollars are stated
in thousands):
<TABLE>
At September 30,
1993 1992 1991
Weighted Weighted Weighted
Average Average Average
Period of Maturity Amount Rate Amount Rate Amount Rate
<S> <C> <C> <C> <C> <C> <C>
3 Months or less $ 40,422 4.12% $ 54,050 5.09% $ 63,293 6.71%
More than 3 months to 1 year 59,840 4.95 78,553 5.57 94,476 6.80
More than 1 year to 3 years 38,278 5.29 41,807 7.02 57,940 7.89
More than 3 years 6,109 5.33 4,163 6.19 4,385 7.77
Total $144,649 4.82% $178,573 5.78% $220,094 7.08%
</TABLE>
-64-
At September 30, 1993, Annapolis had deposits of
approximately $288.1 million in approximately 28,100 accounts.
Borrowings
In addition to savings deposits, Annapolis derives funds
from loan repayments and borrowings. Loan repayments are a
relatively stable source of funds, while savings inflows and
outflows are significantly influenced by general interest rates
and money market conditions. Borrowings may be used on a short-
term basis to compensate for reductions in normal sources of
funds, such as savings inflows at less than projected levels.
They may also be used on a longer-term basis to support expanded
activities.
The following table sets forth certain information as to
Annapolis' borrowings at the dates indicated (dollars are stated
in thousands):
<TABLE>
At September 30,
1993 1992 1991
<S> <C> <C> <C>
FHLB of Atlanta advances $ 7,006 $ 8,011 $ 8,017
Weighted average interest rate 8.89% 8.81% 8.81%
Mortgage collateralized bonds $ 9,622 $14,745 $19,207
Weighted average interest rate 9.50% 9.50% 9.46%
Amounts due first lienholders - $ 1,044 $ 1,595
Weighted average interest rate - 8.79% 8.75%
Total borrowings $16,628 $23,800 $28,819
Weighted average interest rate 9.24% 9.24% 9.24%
</TABLE>
See "Business of AB -- FNB Loan" for a discussion of AB's
borrowings from FNB.
Competition
Annapolis experiences substantial competition in attracting
and retaining savings deposits and in lending funds. Direct
competition for savings deposits comes from other savings and
loan associations, savings banks, commercial banks and credit
unions. Additional significant competition for savings deposits
comes from money market mutual funds and corporate and government
debt securities.
-65-
The primary factors in competing for loans are interest
rates and loan origination fees as well as the range of services
offered by the various financial institutions. Competition for
origination of real estate loans normally comes from other
savings and loan associations, commercial banks, mortgage
bankers, mortgage brokers and insurance companies.
Annapolis has been able to compete effectively in its
primary market area.
In addition to competing with local financial institutions,
Annapolis also has experienced increasing competition from major
money center commercial banks. That competition increased as a
result of changes in Maryland banking laws which became effective
on July 1, 1986 and which expanded Maryland's interstate banking
region to include Alabama, Arkansas, Delaware, Florida, Georgia,
Kentucky, Louisiana, Mississippi, North Carolina, Pennsylvania,
South Carolina, Tennessee, Virginia, West Virginia and the
District of Columbia.
Subsidiary Activities
Annapolis has four wholly-owned subsidiaries: (1) Annapolis
Federal Funding Corporation I; (2) Maryland Service Corporation;
(3) Maryland Service Insurance Corporation; and (4) Maryland
Service Development Corporation. Over the last few years,
Annapolis has been phasing out of the subsidiary activities and
only activities begun prior to 1990 still exist. The activities
of each subsidiary and the amounts invested in each subsidiary
are described below.
Annapolis Federal Funding Corporation I ("AFFC"). AFFC was
incorporated under the laws of the State of Maryland on June 14,
1989, as a limited purpose, wholly-owned finance subsidiary of
Annapolis. On June 29, 1989, AFFC issued four classes of Series
A Mortgage Collateralized Bonds (FHLMC, FNMA and GNMA
Certificates) (the "Bonds") in the principal amount of
$25,141,000 end elected to be treated as a real estate mortgage
investment conduit ("REMIC"). The principal amount, interest
rate and stated maturity of each Class are as follows:
Principal Interest Stated
Class Amount Rate Maturity
A-1 $10,000,000 9.30% December 1, 2001
A-2 $ 9,316,000 9.50% December 1, 2013
A-3 $ 1,703,000 9.50% September 1, 2015
A-4 $ 4,122,000 9.50% September 1, 2019
The Bonds were originally collateralized by $26,761,765 in
principal amount of FHLMC, FNMA, and GNMA Certificates which were
acquired by AFFC from Annapolis in exchange for the Bonds and all
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of the stock of AFFC. Annapolis sold the Bonds and used the
proceeds for general corporate purposes. As of September 30,
1993, the outstanding principal balance of the Bonds was
approximately $9.6 million and the outstanding balance of the
collateral was approximately $10.1 million. For the twelve
months ended September 30, 1993, AFFC had a net loss of $222,108.
Maryland Service Corporation ("MSC"). MSC, a Maryland
corporation, is the parent company of Maryland Service Insurance
Corporation and Maryland Service Development Corporation. Other
than its two subsidiaries, MSC also owns approximately 28 acres
of land consisting of nine lots, presently not buildable, in Anne
Arundel County. At September 30, 1993, Annapolis had an
investment in MSC of $(253,274). For the twelve months ended
September 30, 1993, MSC had a net loss of $422,157.
Maryland Service Insurance Corporation ("MSIC"). MSIC, a
Maryland corporation, is engaged in the business of referring
customers of Annapolis to independent insurance agents for
homeowners, health and life insurance. MSIC earns a commission
for its referral services. As of September 30, 1993 MSC had an
investment in MSIC in the amount of $34,743. For the twelve
months ended September 30, 1993, MSIC had a net loss of $75.
Maryland Service Development Corporation ("MSDC"). MSDC, a
Maryland corporation, is engaged in three active joint ventures
in which MSDC has a 50% interest. As of September 30, 1993, MSC
had an investment in MSDC of $42,272. For the twelve months
ended September 30, 1993, MSDC had a net loss of $351,896.
Employees
At September 30, 1993, Annapolis employed 133 persons on a
full-time basis and 22 on a part-time basis. A comprehensive
employee benefits program is maintained which provides
hospitalization and major medical insurance, a 401K/profit
sharing plan, accidental death insurance and workers
compensation. In addition, full-time employees are enrolled in a
long-term salary continuation plan. None of Annapolis' employees
is represented by any collective bargaining group and management
considers its relations with its employees to be satisfactory.
Regulatory Matters
Overall Regulatory Structure. AB and Annapolis are subject
to extensive regulation by the OTS. The lending activities and
other investments of Annapolis must comply with various federal
regulatory requirements. The OTS periodically examines AB and
Annapolis for compliance with various regulatory requirements.
AB and Annapolis must file reports with the OTS describing their
activities and financial condition. Annapolis is also subject to
periodic examination by the FDIC, which has supervision over the
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SAIF, the fund which insures deposits of savings institutions.
Annapolis is also subject to certain reserve requirements
promulgated by the Federal Reserve Board and the FDIC. This
supervision and regulation is intended primarily for the
protection of depositors. Certain of these regulatory
requirements are referred to below.
Annapolis' relationship with its depositors and borrowers
is also regulated to a great extent by both federal and state
laws, especially in such matters as deposit accounts, interest
rates on loans and the form and content of Annapolis' loan
documents and disclosures.
On October 6, 1993, the OTS terminated a Supervisory
Agreement between Annapolis and the OTS dated March 17, 1992 (the
"Supervisory Agreement"). The Supervisory Agreement required
Annapolis, among other things, to adopt loan underwriting
policies and procedures consistent with regulatory requirements,
reduce the level of classified and special mention assets, and
discontinue the payment of dividends until total classified
assets equal an amount less than Annapolis' total risk-based
capital. In September 1993, the Board of Directors of Annapolis
resolved to continue to comply with regulatory policies,
procedures and requirements relating to loan underwriting,
appraisals, valuation of real estate owned, asset classification,
valuation allowances, capital distributions, nonaccrual loans and
loans to affiliated persons and to further reduce classified and
special mention assets. As a result of this resolution and the
improved financial condition of Annapolis, the OTS terminated the
Supervisory Agreement.
Federal Home Loan Bank System. Annapolis is a member of
the Federal Home Loan Bank System ("FHLB"), which consists of 12
regional FHLBs subject to supervision and regulation by the
Federal Housing Finance Board ("FHFB"), as successor to the
Federal Home Loan Bank Board. The FHLBs provide a central credit
facility primarily for member institutions. As a member of the
FHLB of Atlanta, Annapolis is required to acquire and hold shares
of capital stock in the FHLB of Atlanta in an amount at least
equal to 1% of the aggregate unpaid principal of its home
mortgage loans, home purchase contracts, and similar obligations
at the beginning of each year, or 1/20 of its advances
(borrowings) from the FHLB of Atlanta, whichever is greater.
Annapolis was in compliance with this requirement with an
investment of FHLB stock at September 30, 1993 of approximately
$2.3 million. As of September 30, 1993, Annapolis had $7 million
in advances outstanding from the FHLB of Atlanta.
Liquidity Requirements. Annapolis is required to maintain
average daily balances of liquid assets (cash, deposits
maintained pursuant to Federal Reserve Board requirements, time
and savings deposits in certain institutions, obligations of
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states and political subdivisions thereof, shares in mutual funds
with certain restricted investment policies, highly rated
corporate debt, and mortgage loans and mortgage-related
securities with less than one year to maturity or subject to
purchase within one year) at a specified percentage (currently
5%) of its respective net withdrawable savings deposit plus
short-term borrowings. Annapolis also has been required to
maintain average daily balances of short-term liquid assets at a
specified percentage (currently 1%) of the total of its net
withdrawable savings accounts and borrowings payable in one year
or less. Monetary penalties may be imposed for failure to meet
liquidity requirements. Annapolis' regulatory liquidity at
September 30, 1993 was 15.17%.
Insurance of Accounts. As a SAIF-insured institution,
Annapolis is subject to insurance assessments imposed by the
FDIC. Under current law, the insurance assessment paid by SAIF-
insured institutions such as Annapolis, must be the greater of
0.15% of the institution's average assessment base (as defined)
or such rate as the FDIC, in its sole discretion, determines to
be appropriate to be able to increase (or maintain) the reserve
ratio to 1.25% of estimated insured deposits (or such higher
ratio as the FDIC may determine in accordance with the statute)
within a reasonable period of time. Through December 31, 1993,
the assessment rate is to be determined pursuant to the
transitional risk-based assessment schedules issued by the FDIC
pursuant to the Federal Deposit Insurance Corporation Improvement
Act of 1991 ("FDICIA"). Based on Annapolis' current financial
condition and capital levels, it does not expect that the
transitional risk-based assessment schedule will have a material
impact on its earnings.
Qualified Thrift Lender Test. Under the Home Owners' Loan
Act, as amended by the 1991 Banking Law, savings institutions
such as Annapolis are required under OTS regulations to maintain
a minimum of 65% of their total portfolio assets (as defined in
the statute) in certain investments ("Qualified Thrift
Investments") on a monthly average basis in 9 out of every 12
months in order to remain a Qualified Thrift Lender. Qualified
Thrift Investments generally consist of (i) loans that were made
to purchase, refinance, construct, improve or repair domestic
residential or manufactured housing, (ii) home equity loans,
(iii) securities backed by or representing an interest in
mortgages in domestic residential or manufactured housing, (iv)
obligations issued by the federal deposit insurance agencies, and
(v) shares of stock issued by any FHLB. Subject to a 20% of
assets limitation, Qualified Thrift Investments also includes
consumer loans, investments in certain subsidiaries, loans for
the purchase or construction of schools, churches, nursing homes
and hospitals, 200% of investments in loans for low-to-moderate
income housing and certain other community-oriented investments,
and shares of stock issued by FHLMC or FNMA.
-69-
A savings institution that fails to become or remain a
Qualified Thrift Lender must either become a bank (other than a
savings bank) or become subject to the following restrictions on
its operations: (i) the savings association may not engage in any
new activity or make any new investment, directly or indirectly,
unless such activity or investment is permissible for a national
bank; (ii) the branching powers of the institution shall be
restricted to those of a national bank; (iii) the institution
shall not be eligible to obtain any advances from its FHLB; and
(iv) payment of dividends by the institution shall be subject to
the rules regarding payment of dividends by a national bank. In
addition, a savings and loan holding company must register as,
and will be deemed to be, a bank holding company with the Federal
Reserve Board within one year after the savings association
should have become or ceases to be a Qualified Thrift Lender.
As of September 30, 1993, approximately 71.40% of
Annapolis' assets were invested in Qualified Thrift Investments
as currently defined, or well in excess of the percentage
required to qualify Annapolis as a Qualified Thrift Lender.
Regulatory Capital Requirements. Under current OTS capital
standards, savings institutions must maintain "tangible" capital
equal to 1.5% of adjusted total assets, "core" capital equal to
3% of adjusted total assets and a combination of core and
"supplementary" capital, or total capital, equal to 8% of risk-
weighted assets. For purposes of the regulation, core capital is
defined as common shareholders' equity (including retained
earnings), noncumulative perpetual preferred stock and related
surplus, minority interests in the equity accounts of fully
consolidated subsidiaries, certain nonwithdrawable accounts and
pledged deposits and "qualifying supervisory goodwill." Core
capital is generally reduced by the amount of savings
association's intangible assets for which no market exists.
Limited exceptions to the deduction of intangible assets are
provided for purchased mortgage servicing rights and qualifying
supervisory goodwill. Tangible capital is defined as core
capital minus qualifying supervisory goodwill and other
intangible assets with only a limited exception for purchase
mortgage servicing rights. Both core and tangible capital are
further reduced by an amount equal to the savings institution's
debt and equity investments in subsidiaries engaged (with certain
exceptions) in activities not permissible to national banks.
Based on the foregoing, Annapolis' core and tangible
capital at September 30, 1993 were $17.2 million each, or 5.3% of
adjusted total assets. Therefore, Annapolis' core and tangible
capital was in excess of regulatory requirements. Annapolis does
not have any supervisory goodwill.
As of September 30, 1993, Annapolis' risk-weighted assets
were approximately $205.1 million and its total risk-based
-70-
capital was approximately $19.7 million, representing 9.6% of its
risk-weighted assets. Therefore, Annapolis had capital in excess
of the fully phased-in, risk-based capital requirements.
The following table sets forth Annapolis' regulatory
capital position at September 30, 1993 (dollars are stated in
thousands):
Amount Percent Actual Actual Excess
Required Required Amount Percent Amount
Tangible
Capital $ 4,848 1.50% $17,180 5.32% $12,332
Core
Capital $ 9,696 3.00% $17,180 5.32% $ 7,484
Risk-Based
Capital $16,407 8.00% $19,748 9.63% $ 3,341
The following table presents a reconciliation of capital
under generally accepted accounting principles ("GAAP") to
regulatory capital as of September 30, 1993 (dollars are stated
in thousands):
Tangible Core Total
Capital Capital Capital
GAAP capital $17,643 $17,643 $17,643
Nonallowable assets:
Nonincludable subsidiaries (463) (463) (463)
Supplementary capital items:
General valuation allowances - - 2,568
Regulatory capital computed $17,180 $17,180 $19,748
The OTS is required to prescribe capital standards for
savings associations that are no less stringent than those
applicable to national banks. Effective December 31, 1990, the
regulator of national banks, the OCC, amended the leverage
capital requirement applicable to national banks to require such
banks to maintain "core" or "Tier I" capital of at least 3% of
total assets, provided that all but the strongest banks are
expected to maintain a ratio of 1% to 2% above the stated
minimum. As a result the OTS now requires savings associations
to maintain core capital consistent with the OCC's amended
leverage capital requirement.
If a savings institution fails to meet any of the core,
tangible or risk-based capital standards described above, the OTS
capital regulations would prohibit asset growth by the
association and require compliance with a capital directive,
which may include a regulation that capital and liquid assets be
increased and that the payment of interest on deposits, the
issuance of new deposit accounts, the making or purchasing of
loans and the payment of dividends and operational expenses,
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including compensation, be restricted. It is also OTS policy to
require such an institution to submit a plan for increasing
capital. Other restrictions determined to be appropriate by the
Director of the OTS for the safety and soundness of the savings
institution or its depositors also may be imposed. The
institution may request an exemption from compliance with the
capital directive. Such exemption also must include a capital
plan for increasing capital. The material failure of a savings
institution to comply with any plan, regulation, written
agreement, order or directive issued is treated as an unsafe and
unsound practice.
Loans to One Borrower. Annapolis also generally is subject
to loan-to-one-borrower limits which are substantially the same
as those applicable to national banks. Under these limits, loans
and extensions of credit to one borrower outstanding at one time
and not fully secured by readily marketable collateral shall not
exceed 15% of the unimpaired capital and unimpaired surplus of
the savings institution. Loans and extensions of credit fully
secured by readily marketable collateral may comprise an
additional 10% of unimpaired capital and unimpaired surplus.
Notwithstanding these limits, savings institutions are also
authorized to make loans to one borrower to develop domestic
residential housing units, not to exceed the lesser of $30
million or 30% of the savings association's unimpaired capital
and unimpaired surplus, provided that (i) the purchase price of
each single-family dwelling in the development does not exceed
$500,000; (ii) the savings association is in compliance with its
fully phased-in capital requirements; (iii) the loans comply with
applicable loan-to-value requirements; (iv) the aggregate amount
of loans under this authority does not exceed 150% of unimpaired
capital and surplus and (v) either the OTS issues an order
permitting the savings association to use this higher limit or
the savings association meets the requirements for "expedited
treatment." A savings institution meets the requirements of
"expedited treatment" if, among other things, it has a composite
MACRO rating of 1 or 2, a Community Reinvestment Act rating of
satisfactory or better, and has not been notified by supervisory
personnel that it is a problem association or an association in
troubled condition. These limits also authorize a savings
institution to make loans to one borrower to finance the sale of
real property acquired in satisfaction of debts in an amount up
to 50% of unimpaired capital and surplus.
As of September 30, 1993, the largest aggregate amount of
loans Annapolis had made to any one borrower was approximately
$3.6 million. As of September 30, 1993, the aggregate amount of
loans Annapolis could make to any borrower, including related
entities, was with certain exceptions, limited to approximately
$3.0 million. Prior to the enactment of the Financial
Institutions Reform, Recovery, and Enforcement Act of 1989
("FIRREA"), savings institutions were permitted to loan greater
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amounts to one borrower than now allowed, although loans to one
borrower outstanding on August 9, 1989 in excess of current
limits are "grandfathered."
Dividend Policy
Annapolis is subject to certain dividend restrictions set
forth by the OTS and FNB. Under the OTS restrictions, Annapolis
may not, without the approval of the OTS, declare dividends in
excess of the higher of either, the sum of the current year's net
income and the amount that would reduce by one-half its surplus
capital ratio (as defined) or 75 percent of its net income for
the most recent four-quarter period. Annapolis paid no dividends
during the twelve months ended September 30, 1993. See "Market
for and Dividends Paid on AB Common Stock".
Legal Proceedings
There are no material pending or threatened legal
proceedings against AB or Annapolis or to which any of their
properties are subject.
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AB MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Comparison of Financial Condition and Operating Results for the
Years Ended September 30, 1993 and 1992
Changes in Financial Condition. Total assets at
September 30, 1993 were approximately $325.0 million as compared
with approximately $353.7 million at September 30, 1992, a
decrease of $28.7 million or 8.1%. The decrease was primarily
attributable to a decrease of approximately $22.7 million in
loans receivable which was offset by a decrease of approximately
$22.6 million in customer deposits. AB's management, in an
effort to maximize profitability, set deposit rates at levels to
permit the deposit runoff principally as a result of reduced loan
demand and relatively low yields available on investment
securities.
Interest earning assets decreased $16.3 million while
interest costing liabilities decreased $29.8 million. The net
improvement of $13.5 million in interest earning assets resulted
from a decrease in cash and cash equivalents of $5.4 million, and
total reductions of $6.1 million in real estate acquired through
foreclosure, real estate held for development and sale, and
investments and loans to joint ventures as AB continued to
resolve troubled assets and divest of subsidiary activities. The
income tax refund receivable decreased $0.7 million as refunds
from prior year net operating loss carrybacks were received.
Shareholders' equity increased by $957,000 or 10.0% during
the year from $9.6 million to $10.5 million as a result of net
income. No dividends were paid during the fiscal year ended
September 30, 1993.
Results of Operations. Net income for the fiscal year
ended September 30, 1993 increased to $957,000, or $.79 per
share, as compared to a loss of $2.9 million, or $(2.38) per
share for fiscal 1992. The increase in net income resulted
primarily from increased net interest income and a reduction in
the provision for loan losses, both related to improved asset
quality. Return on average assets was .28% versus (0.78)% for
fiscal 1992. Return on average equity was 9.4% versus (24.0)%
for the year ended September 30, 1992.
Net Interest Income. Net interest income increased $1.6
million or 19.0% to $10.0 million for the fiscal year ended
September 30, 1993. The increase primarily resulted from the
improved ratio of interest earning assets to interest costing
liabilities as AB reduced its total nonperforming assets by $7.5
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million or 32.9%, to a total of $15.2 million at September 30,
1993.
Provision for Loan Losses. The provision for loan losses
in fiscal 1993 decreased to $156,000 from $5.9 million in the
prior year. The reduced provision in 1993 resulted from improved
nonperforming asset ratios and generally improved conditions of
the loan portfolio. Net charge-offs for fiscal 1993 were
$455,000 as compared to $3.9 million in 1992. The allowance for
loan losses represented 1.29% of loans receivable and 19.04% of
non-performing assets at September 30, 1993, as compared to 1.28%
and 14.09%, respectively at September 30, 1992.
Other Income and Expenses. Total other income for fiscal
1993 was $763,000, a decrease of $576,000 from the 1992 total of
$1,339,000. Other income decreased $562,000 primarily due to the
receipt of $418,000 in fiscal 1992 of unrecognized interest on a
federal income tax claim dating to 1982. Loan servicing fees
decreased $79,000 as the mortgage loan servicing portfolio
decreased as a result of mortgage loan refinancings. Gains on the
sale of new mortgage loan originations were $146,000 for fiscal
1993 versus a loss on the sale of loans in the amount of $112,000
in the prior year. The gains generally resulted from the sale of
30-year, fixed-rate mortgages at premium rates with less loan
origination fees than in the prior year.
Other expenses increased by $432,000 or 4.92% for fiscal
1993 as compared with fiscal 1992. The increase was primarily
related to increases of $161,000 and $122,000 in real estate
operations costs and professional fees, respectively, related to
the resolution and management of troubled assets. Other general
and administrative expenses increased $149,000, or 1.8%, to $8.5
million for fiscal 1993.
Income Taxes. Income tax expense was $398,000 or 29.4% of
pretax income for fiscal 1993 as compared to income tax benefits
of $2.1 million or 42.2% of the 1992 pretax loss. The effect of
AB adopting SFAS 109, "Accounting for Income Taxes" in the year
ended September 30, 1992, was to increase the tax benefit by
approximately $680,000.
Comparison of Financial Condition and Operating Results for the
Years Ended September 30, 1992 and 1991
Changes in Financial Condition. Total assets at
September 30, 1992 were $353.7 million as compared to $373.3
million at September 30, 1991; a decrease of $19.6 million or
5.3%. The decrease consisted of a decrease of $6.7 million in
mortgage-backed securities and a decrease of $22.3 million in
loans receivable offset by an increase of $9.4 million in real
estate acquired through foreclosure. Liability reductions
consisted of a decrease in deposits of $10.4 million or 3.2% to a
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total of $310.7 million at September 30, 1992, and a reduction of
$4.5 million or 23.4% in the amount of bonds payable.
Interest-earning assets decreased $37.5 million while
interest-costing liabilities were reduced by $15.5 million.
Approximately $10.7 million of the $22.0 million net decrease in
interest-earning assets was invested by AB in short-term
overnight deposits. The income tax refund receivable increased
$1.2 million and the major remaining decrease was attributable to
the increase in real estate acquired through foreclosure.
Shareholders' equity decreased by $2.6 million or 21.3%
during the year from $12.2 million to $9.6 million as a result of
net losses during fiscal 1992. No dividends were paid during the
fiscal year ended September 30, 1992.
Results of Operations. A net loss of $2.9 million or
$(2.38) per share was incurred in fiscal 1992 as compared to net
income of approximately $.6 million or $.51 per share for the
prior year. The decrease of approximately $3.5 million was
attributable primarily to an increase of $5.7 million in loan
loss provisions and a reduction in net interest income of $.6
million offset by a reduction in income tax expense of
approximately $2.6 million. Return on average assets was (.78)%
versus .15% for fiscal 1991. Return on average equity was
(24.0)% as compared to 5.1% for the year ended September 30,
1991.
Net Interest Income. Net interest income decreased
$568,000, or 6.33% to $8.4 million for the fiscal year ended
September 30, 1992. The decrease was a result of the reduction
in the ratio of interest earning assets to interest costing
liabilities. Nonperforming assets increased $11.3 million, or
99.1%, to a total of $22.7 million at September 30, 1992.
Provision for Loan Losses. The provision for loan losses
in fiscal 1992 increased to $5.9 million from $230,000 in the
prior year as a result of the increase in nonperforming assets
and recognition of losses in the loan portfolio. Net charge-offs
for fiscal 1992 were $3.9 million as compared to $767,000 in the
prior year. The allowance for loan losses represented 1.28% of
loans receivable and 14.09% of nonperforming assets at September
30, 1992, as compared to .44% and 10.56%, respectively at
September 30, 1991.
Other Income and Expenses. Total other income for the
fiscal year ended September 30, 1992 was $1.3 million, an
increase of $200,000 over the 1991 total of $1.1 million. As a
result of a declining loan servicing portfolio, loan servicing
fees decreased $128,000 from the prior year. Losses were $61,000
on the divestiture of mutual funds investments versus gains of
$24,000 on investment sales in the year ended September 30, 1991.
-76-
The decreases were offset by an increase in other income of
$472,000 to a total of $774,000 for fiscal 1992, primarily
attributable to the receipt of $418,000 of interest received on a
1982 federal income tax claim.
Total other expenses increased $20,000, or .2%, well below
the rate of inflation, to a total of $8,773,000 for the fiscal
year ended September 30, 1992, as AB intensified cost reduction
measures. Total compensation and benefits decreased $60,000, or
1.4%, to a total of $4,378,000. Other expenses decreased by
$192,000 or 10.3%. These decreases were partially offset by an
increase of $115,000 or 7.9% in occupancy and equipment as a
result of a data processing system conversion and related write-
off of old equipment and an increase of $118,000 or 65.9% in
professional fees related to increased levels of troubled assets.
Income Taxes. Income tax benefits as a result of the net
operating loss for fiscal 1992 were $2,094,000, or 42.2% of the
pre-tax loss as compared to income tax expense of $535,000 or
48.9% of pre-tax income for the year ended September 30, 1991.
Included in the fiscal 1992 tax benefit was approximately
$680,000 related to the adoption of SFAS 109, "Accounting for
Income Taxes".
Liquidity and Capital Resources
Annapolis' primary sources of funds are deposits, proceeds
from principal and interest payments on loans, investments and
mortgage-backed securities and, if necessary, FHLB-Atlanta
advances. While maturities and scheduled amortization of loans
and mortgage-backed securities are a predictable source of funds,
deposit flows and mortgage prepayments are greatly influenced by
general interest rates, economic conditions, competition and most
recently the restructuring of the thrift industry. Annapolis is
required to maintain minimum levels of liquid assets as defined
by OTS regulations. This requirement, which may be varied at the
direction of the OTS depending upon economic conditions and
deposit flows, is based upon a percentage of deposits and short-
term borrowings. The required ratio is currently 5%.
Annapolis' most liquid assets are cash and cash
equivalents, which include investments in highly liquid, short-
term investments. At September 30, 1993, cash and cash
equivalents totaled $15.4 million. Annapolis' liquidity ratio of
15.17% was significantly higher than the regulatory requirement
of 5%. Annapolis anticipates that it will continue to have
sufficient funds available to meet its commitments.
Under current capital regulations, savings institutions
must have: (i) core capital equal to 3% of adjusted total
assets, (ii) tangible capital equal to 1.5% of adjusted total
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assets, and (iii) total capital equal to 8.0% of risk-weighted
assets.
In measuring its compliance with capital regulations, a
savings institution must deduct from capital its investments in,
and advances to, subsidiaries engaged in activities not
permissible for national banks (i.e., joint ventures). There is
a five-year phase-in of this provision for investments held as of
April 12, 1989. At September 30, 1993, this phase-in requirement
requires a 60% deduction which increases through additional
phases to 100% at June 30, 1994.
Certain other regulatory capital amendments are mandated or
expected to occur in future periods. These amendments may
include among other things possible increases in required core
capital levels to between 4% and 5%. Based upon the current
proposed capital requirements, management does not believe that
the proposed regulations will have a material adverse impact on
Annapolis. However, events beyond the control of Annapolis, such
as a downturn in the economy in areas where Annapolis originates
most of its loans, could adversely affect future earnings and,
consequently, the ability of Annapolis to meet its future minimum
capital requirements.
Annapolis' capital ratios exceed all three required levels,
with tangible capital ratio and core capital ratio of 5.3% and a
risk-based capital ratio of 9.6%.
Impact of Inflation and Changing Prices
The consolidated financial statements and related data
presented herein have been prepared in accordance with GAAP which
requires the measurement of financial condition and operating
results in terms of historical dollars without considering
changes in the relative purchasing power of money over time due
to inflation or deflation.
The majority of the assets and liabilities of a financial
institution are monetary in nature. As a result, interest rates
have a significant impact on a financial institution's
performance. Inflation has a tendency to increase interest rates
and create a volatile interest rate environment. Therefore, it
is imperative that Annapolis be able to match the maturity
structure of its assets and liabilities to maintain an acceptable
performance level during periods of a rapidly changing economy.
Impact of New Accounting Standards
In May, 1993, the Financial Accounting Standards Board
issued SFAS No. 114, "Accounting by Creditors for Impairment of a
Loan," which requires impaired loans to be measured based on the
present value of expected future cash flows discounted at the
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loan's effective interest rate, or at the loan's observable
market price or the fair value of a collateral dependent loan.
The Statement is effective for fiscal years beginning after
December 15, 1994. Management believes that the adoption of the
Statement will not have a material impact on financial position
or results of operations.
The Financial Accounting Standards Board also issued SFAS
No 115, "Accounting for Certain Investments in Debt and Equity
Securities," in May 1993. SFAS No. 115 addresses the accounting
and recording for investments in equity securities that have
readily determinable fair values and for all debt securities. The
Statement is effective for fiscal years beginning after December
15, 1993. Management believes that the adoption of the Statement
will not have a material adverse effect on the financial position
or results of operations of Annapolis.
Interest Rate Sensitivity and Related Matters
The matching of assets and liabilities may be analyzed by
examining the extent to which such assets and liabilities are
"interest rate sensitive" and by monitoring an institution's
interest rate sensitivity "gap." An asset or liability is said
to be interest rate sensitive within a specific time period if it
will mature or reprice within that specific time period. The
interest rate sensitivity gap is defined as the excess of
interest-earning assets maturing or repricing within that same
time period. A gap is considered positive when the amount of
interest rate sensitive assets exceeds the amount of interest
rate sensitive liabilities. During a period of rising interest
rates, a negative gap would tend to adversely affect net interest
income, while a positive gap would tend to result in an increase
in net interest income. During a period of falling interest
rates, a negative gap would tend to result in an increase in net
interest income, while a positive gap would tend to adversely
affect net interest income.
The objective of asset/liability management is to maximize
and stabilize AB's earnings over the long term through effective
management of the risk associated with interest rate
fluctuations. Net interest income depends on the levels of AB's
interest-earning assets and interest-bearing liabilities and the
related interest earned or paid. Through a strategy of matching
maturities and rate adjustments on its interest-sensitive assets
and liabilities, AB has attempted to protect itself from the
adverse impact of rising interest rates and to stabilize its
interest income over the long term.
In recent years, AB has implemented certain asset/liability
matching strategies, which include (1) the origination of loans
with adjustable-rate features, (2) emphasis on the acquisition of
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core deposits and (3) the origination and sale of all thirty year
fixed-rate mortgages.
AB has adopted an interest rate risk policy statement to
manage its exposure to interest rate risk and to ensure that such
exposure is kept within prudent levels. AB recognizes the
inherent risk in a liability-sensitive position, particularly in
periods of rising interest rates. Thus, it has significantly
reduced its interest rate sensitivity.
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The table indicates the time periods in which interest-
earning assets and interest-bearing liabilities will mature or
reprice in accordance with their contractual terms adjusted for
anticipated loan principal reductions, prepayments and repricing
and expected deposit decay rates as of September 30, 1993.
However, the table does not necessarily indicate the impact of
general interest rate movements on AB's net interest yield
because the repricing of various categories of assets and
liabilities is discretionary and is subject to competitive and
other pressures. As a result, various assets and liabilities
indicated as repricing within the same period may in fact reprice
at different times and at different rate levels (dollars are
stated in thousands):
<TABLE>
Maturing or Repricing In:
More than More than More than More than
3 Months 3 Months 6 Months 1 Year 3 Years Over
or Less to 6 Months to 1 Year to 3 Years to 5 Years 5 Years Total
<S> <C> <C> <C> <C> <C> <C> <C>
Rate Sensitive Assets:
Loans and securities secured by
adjustable-rate mortgages $39,852 $ 4,394 $ 95,133 $12,863 $ 0 $ 0 $152,242
Loans and securities secured by
fixed-rate mortgages 3,774 3,544 6,464 22,852 12,845 22,056 71,535
Non-mortgage loans 20,772 371 673 1,881 0 1,132 24,829
Investment securities(1) 580 10,262 23,485 2,993 1,604 4,291 43,215
Total rate sensitive assets 64,978 18,571 125,755 40,589 14,449 27,479 291,821
Rate Sensitive Liabilities:
Certificate accounts 37,375 53,954 5,915 38,249 6,109 0 141,602
Passbook accounts 4,355 4,157 7,755 24,708 16,108 38,606 95,689
Transaction accounts and escrows 2,079 3,386 5,721 12,031 3,461 7,798 34,476
Money market deposit accounts 5,442 3,684 4,182 1,853 882 802 16,845
FHLB advances 0 0 1,000 6,000 0 0 7,000
Bonds payable 369 355 684 2,531 1,771 4,133 9,843
Notes payable 0 0 43 377 440 6,442 7,302
Total rate sensitive
liabilities 49,620 65,536 25,300 85,749 28,771 51,781 312,751
Interest sensitivity GAP
per period 15,358 (46,965) 100,455 (45,160) (14,322) (30,302) $(20,939)
Cumulative interest
sensitivity GAP $15,358 $(31,607) $ 68,848 $23,688 $9,366 $(20,936)
Percentage of cumulative GAP
to total assets 4.73% -9.72% 21.18% 7.29% 2.88% -6.44%
Cumulative ratio of rate sensitive
assets to rate sensitive
liabilities 1.31 0.73 1.49 1.10 1.04 0.93
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<FN>
(1) Includes stock in Federal Home Loan Bank of Atlanta, interest-bearing deposits and collateralized mortgage
obligations.
</TABLE>
The following table presents certain information regarding
changes in the interest income and interest expense of AB for the
periods indicated. For each major category of interest-earning
assets and interest-bearing liabilities, information is provided
with respect to changes attributable to changes in volume,
changes in interest rates, and the combined effect of changes in
volume and interest rates. The changes in interest due to both
rate and volume has been allocated proportionately to volume
variance and rate variance based on the relationship of the
absolute dollar changes in each (dollars are stated in
thousands):
<TABLE>
Year Ended Sept. 30, 1993 Year Ended Sept. 30, 1992
Compared to Year Ended Compared to Year Ended
September 30, 1992 September 30, 1991
Increase (Decrease) Increase (Decrease)
Volume Rate Net Volume Rate Net
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets $(3,002) $ (772) $(3,774) $(1,533) $(3,427) $(4,960)
Loans receivable (643) (428) (1,071) (188) (335) (523)
Mortgage-backed securities
Investment securities and other
investment-earning assets 437 (341) 96 129 (690) (561)
Total interest-earning
assets (3,208) (1,541) (4,749) (1,592) (4,452) (6,044)
Interest-bearing liabilities
Deposits (986) (4,307) (5,293) (374) (4,782) (5,156)
Borrowings (646) (360) (1,006) (552) 232 (320)
Total interest-bearing
liabilities (1,632) (4,667) (6,299) (926) (4,550) (5,476)
Increase (decrease) in
net interest income $(1,576) $ 3,126 $ 1,550 $ (666) $ 98 $ (568)
</TABLE>
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The following table sets forth the weighted average yields
earned by Annapolis on its interest-earning assets and the
weighted average rates paid on its interest-bearing liabilities
for the periods indicated (dollars are stated in thousands):
<TABLE>
Year Ended September 30,
1993 1992 1991
Average Average Average
Average Yield/ Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost Balance Interest Cost
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning
assets
Loans receivable $224,796 $20,081 8.93% $257,956 $23,855 9.25% $273,217 $28,815 10.54%
Mortgage-backed
securities 36,698 2,717 7.40 44,837 3,788 8.45 46,975 4,311 9.18
Investment securities
and other interest-
earning assets(1) 43,469 2,031 4.67 34,958 1,935 5.54 32,980 2,496 7.57
Total interest-
earning assets 304,963 24,829 8.14 337,751 29,578 8.76 353,372 35,622 10.08
Noninterest-
earning assets 35,296 32,078 28,675
Total assets $340,259 $369,829 $382,047
Interest-bearing
liabilities
Deposits $297,341 12,375 4.16 $318,011 17,668 5.56 $323,868 22,824 7.05
Borrowings 27,410 2,501 9.12 34,068 3,507 10.29 39,634 3,827 9.66
Total interest-bearing
liabilities 324,751 14,876 4.58 352,079 21,175 6.01 363,502 26,651 7.33
Noninterest-bearing
liabilities 5,377 5,789 7,602
Total liabilities 330,128 357,868 371,104
Equity 10,131 11,961 10,943
Total liabilities
and share-
holders' equity $340,259 $369,829 $382,047
Net interest
income/interest
rate spread $ 9,953 3.56% $ 8,403 2.75% $ 8,971 2.75%
Net interest-
earning assets/
net yield on
interest-
earning assets $(19,788) 3.26% $(14,328) 2.49% $(10,130) 2.54%
Ratio of average interest-
earning assets to average
interest-bearing
liabilities .94x .96x .97x
<FN>
(1) Investment securities and other interest-earning assets includes collateralized mortgage obligations.
</TABLE>
MARKET FOR AND DIVIDENDS PAID
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ON AB COMMON STOCK
Because AB Common Stock is privately held and not listed for
trading on any exchange or quotation system, there is no market
for AB Common Stock. The last sale price per share of AB Common
Stock known to AB was $8.00 on March 5, 1993.
Prior to June 1990, AB paid quarterly cash dividends on the
AB Common Stock in the amount of $0.125 per share. As a result
of the OTS examination of Annapolis in June 1990, the OTS prohib-
ited Annapolis from paying cash dividends to AB which prevented
AB from paying cash dividends to its shareholders. The Supervi-
sory Agreement also prohibited Annapolis from paying cash divi-
dends to AB until such agreement was terminated by the OTS in
October 1993. Currently, the Loan Agreement restricts the amount
of cash dividends that may be paid by AB to its shareholders.
See "Business Of AB."
AB SECURITY OWNERSHIP OF
CERTAIN BENEFICIAL OWNERS
The following table sets forth certain information regarding
the beneficial ownership of AB Common Stock as of January 31,
1994 by each of AB's directors and by all directors and executive
officers of AB as a group. No other person or group of persons
owns 5% or more of AB Common Stock.
Beneficial
Ownership Percent of
Name of Shares Class Owned
Garnett Y. Clark 62,750 5.20 %
William F. Chaney 74,266 6.16 %
Henry E. Ciccarone 130,000 10.78 %
Thomas E. Florestano 78,500 6.51 %
Gilbert L. Hardesty 130,375 10.81 %
Marjorie S. Holt 62,500 5.18 %
Richard T. McGraw 130,375 10.81 %
Benjamin Michaelson, Jr. 125,500 10.40 %
Charles L. Richards 118,890 9.85 %
All directors and
executive officers
as a group (13 persons) 918,156(1) 75.85 %
(1) Includes 4,000 shares which may be acquired through the exercise of an
option granted by AB to an officer.
SUPERVISION AND REGULATION OF CRESTAR
Bank holding companies and banks are extensively regulated
under both federal and state law. To the extent that the follow-
ing information describes statutory or regulatory provisions, it
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is qualified in its entirety by reference to the particular
statutory or regulatory provisions. Any change in applicable law
or regulation may have a material effect on the business and
prospects of Crestar and its subsidiaries.
Limits on Dividends and Other Payments
Crestar is a legal entity separate and distinct from its
Bank Subsidiaries. A large portion of Crestar's revenues results
from dividends paid to Crestar by its Bank Subsidiaries. The
right of Crestar, and consequently the right of creditors and
shareholders of Crestar, to participate in any distribution of
the assets or earnings of any subsidiary, including any Bank
Subsidiary through the payment of such dividends or otherwise is
necessarily subject to the prior claims of creditors of the
subsidiary, including any Bank Subsidiary, except to the extent
that claims of Crestar in its capacity as a creditor may be
recognized. In addition, under federal law, the Bank Subsidiar-
ies may not, subject to certain limited exceptions, make loans or
extensions of credit to, or investments in the securities of,
Crestar or take securities of Crestar as collateral for loans to
any borrower. The Bank Subsidiaries are also subject to
collateral security requirements for any loans or extensions of
credit permitted by such exceptions.
The Bank Subsidiaries are subject to various statutory
restrictions on their ability to pay dividends to Crestar. Under
the current supervisory practices of the Bank Subsidiaries'
regulatory agencies, prior approval from those agencies is
required if cash dividends declared in any given year exceed net
income for that year plus retained earnings of the two preceding
years. Under these supervisory practices, at January 1, 1994,
the Bank Subsidiaries could have paid additional dividends to
Crestar of approximately $106.0 million, without obtaining prior
regulatory approval. The payment of dividends by the Bank
Subsidiaries or Crestar may also be limited by other factors,
such as requirements to maintain capital above regulatory guide-
lines. Bank regulatory agencies have authority to prohibit any
Bank Subsidiary or Crestar from engaging in an unsafe or unsound
practice in conducting their business. The payment of dividends,
depending upon the financial condition of the Bank Subsidiary in
question, or Crestar, could be deemed to constitute such an
unsafe or unsound practice. The Federal Reserve Board has
stated that, as a matter of prudent banking, a bank or bank
holding company should not maintain its existing rate of cash
dividends on common stock unless (1) the organization's net
income available to common shareholders over the past year has
been sufficient to fund fully the dividends and (2) the
prospective rate of earnings retention appears consistent with
the organization's capital needs, asset quality, and overall
financial condition.
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Moreover, the Federal Reserve Board has indicated that bank
holding companies should serve as a source of managerial and
financial strength to their subsidiary banks. Accordingly, the
Federal Reserve Board has stated that a bank holding company
should not maintain a level of cash dividends to its shareholders
that places undue pressure on the capital of bank subsidiaries,
or that can be funded only through additional borrowings or other
arrangements that may undermine the bank holding company's
ability to serve as a source of strength.
The ability of Crestar and the Bank Subsidiaries to pay
dividends in the future is, and is expected to continue to be,
influenced by regulatory policies and capital guidelines. The
bank regulatory agencies have broad discretion in developing and
applying policies and guidelines, in monitoring compliance with
existing policies and guidelines, and in determining whether to
modify such policies and guidelines.
Capital Requirements
As a bank holding company, Crestar is subject to regulation
by the Federal Reserve Board under the BHCA. The Federal Reserve
Board, the OCC and the FDIC have issued substantially similar
risk-based and leverage capital guidelines applicable to United
States banking organizations. In addition, those regulatory
agencies may from time to time require that a banking
organization maintain capital above the minimum levels, whether
because of its financial condition or actual or anticipated
growth.
The Federal Reserve Board's risk-based guidelines define a
two-tier capital framework. Tier 1 capital consists of common
and qualifying preferred shareholders' equity, less certain
intangibles and other adjustments. Tier 2 capital consists of
subordinated and other qualifying debt, and the allowance for
credit losses up to 1.25% of risk-weighted assets. The sum of
Tier 1 and Tier 2 capital represents qualifying total capital, at
least 50% of which must consist of Tier 1 capital. Risk-based
capital ratios are calculated by dividing Tier 1 and total
capital by risk-weighted assets. Risk-weighted assets are
determined by assigning assets and off-balance sheet exposures to
one of four categories of risk-weights, based primarily on
relative credit risk. The minimum Tier 1 capital ratio is 4% and
the minimum total capital ratio is 8%. Crestar's Tier 1 and
total capital to risk-weighted asset ratios as of September 30,
1993 were 10.5% and 13.5%, respectively.
In addition, the Federal Reserve Board has established
minimum leverage ratio (Tier 1 capital to quarterly average
tangible assets) guidelines for bank holding companies. These
guidelines provide for a minimum ratio of 3 percent for bank
holding companies that meet certain specified criteria, including
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that they have the highest regulatory rating. All other bank
holding companies will be required to maintain a leverage ratio
of 3 percent plus an additional cushion of at least 100 to 200
basis points. Crestar's leverage ratio as of September 30, 1993
was 8.1%. The guidelines also provide that banking organizations
experiencing internal growth or making acquisitions will be
expected to maintain capital positions well above the minimum
supervisory levels.
FDICIA, among other things, identifies five capital
categories for insured depository institutions (well capitalized,
adequately capitalized, undercapitalized, significantly undercap-
italized and critically undercapitalized) and requires the
federal banking regulators to take prompt corrective action with
respect to insured depository institutions that do not meet the
minimum requirements within such categories. FDICIA imposes
progressively more restrictive constraints on the operations,
management and capital distributions of an institution, depending
upon the category in which the institution is classified.
The federal regulatory agencies have adopted substantially
similar regulations that define the five capital categories
identified by FDICIA, using the total risk-based capital and
leverage capital ratios as the relevant capital ratios. Under
the regulations, a well capitalized institution must have a Tier
1 risk-based capital ratio of at least 6%, a total risk-based
capital ratio of at least 10% and a leverage ratio of at least 5%
and not be subject to a capital directive order. An adequately
capitalized institution must have a Tier 1 risk-based capital
ratio of at least 4%, a total risk-based capital ratio of at
least 8% and a leverage ratio of at least 4% or, in some cases,
3%. Under these guidelines, at September 30, 1993, Crestar and
each of the Bank Subsidiaries were considered well capitalized.
In addition, undercapitalized depository institutions are
required to submit capital restoration plans. In order to obtain
acceptance of a capital restoration plan, a depository instituti-
on's holding company must guarantee the capital plan up to an
amount equal to the lesser of 5% of the depository institution's
assets at the time it becomes undercapitalized or the amount of
the capital deficiency at the time that the institution fails to
comply with the plan. In the event of a bankruptcy of the parent
holding company, such guarantee would have priority over the
parent's general unsecured creditors.
FDICIA generally prohibits a depository institution from
making a capital distribution (including payment of a dividend)
or paying any management fee to its holding company if, after
making the distribution or paying the fee, the depository insti-
tution would be undercapitalized. A significantly undercapital-
ized depository institution may be subject to a number of re-
strictions including, among other things, a prohibition on
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capital distributions to its holding company without the prior
approval of the Federal Reserve Board, orders to sell sufficient
voting stock to become adequately capitalized and a requirement
that it reduce total assets. Critically undercapitalized deposi-
tory institutions are subject to the appointment of a conservator
or receiver.
Cross-Guarantee
As a result of the enactment of the FIRREA, a depository
institution insured by the FDIC can be held liable for any loss
incurred by, or reasonably expected to be incurred by, the FDIC
after August 9, 1989 in connection with (i) the default of a
commonly controlled FDIC-insured depository institution or (ii)
any assistance provided by the FDIC to a commonly controlled
FDIC-insured depository institution in danger of default.
"Default" is defined generally as the appointment of a conserva-
tor or receiver and "in danger of default" is defined generally
as the existence of certain conditions indicating that a "de-
fault" is likely to occur in the absence of regulatory assis-
tance. Liability of any Bank Subsidiary under this "cross-guara-
ntee" provision could have a material adverse effect on the
financial condition of such Bank Subsidiary and Crestar.
Bank Holding Companies
Crestar is registered as a bank holding company under the
BHCA. The BHCA requires the prior approval of the Federal
Reserve Board in any case where a bank holding company proposes
to acquire direct or indirect ownership or control of more than
5% of the voting shares of any bank that is not already majority-
-owned by it or to merge or consolidate with any other bank
holding company. The BHCA prohibits the Federal Reserve Board
from approving an application from a bank holding company to
acquire shares of a bank located outside the state in which the
operations of the holding company's banking subsidiaries are
principally conducted, unless such an acquisition is specifically
authorized by statute of the state in which the bank whose shares
are to be acquired is located. Virginia has adopted legislation
permitting such acquisitions by bank holding companies located in
certain states that have reciprocal agreements with Virginia.
The BHCA also prohibits a bank holding company, with certain
exceptions, from acquiring more than 5% of the voting shares of
any company that is not a bank and from engaging in any business
other than banking or managing or controlling banks. Under the
BHCA, the Federal Reserve Board is authorized to approve the
ownership of shares by a bank holding company in any company the
activities of which the Federal Reserve Board has determined to
be so closely related to banking or to managing or controlling
banks as to be a proper incident thereto. The Federal Reserve
Board has by regulation determined that certain activities are
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closely related to banking within the meaning of the BHCA. These
activities include: operating a mortgage company, finance compa-
ny, credit card company or factoring company; performing certain
data processing operations; providing investment and financial
advice; and acting as an insurance agent for certain types of
credit-related insurance.
Banks
The Bank Subsidiaries are supervised and regularly examined
by various federal and state regulatory agencies. The laws and
regulations administered by the regulatory agencies affect
corporate practices, such as payment of dividends (see "-- Limits
on Dividends and Other Payments"), incurring debt and acquisition
of financial institutions and other companies, and affect busi-
ness practices, such as payment of interest on deposits, the
charging of interest on loans, types of business conducted and
location of offices.
FDIC Insurance Assessments
The Bank Subsidiaries are subject to FDIC deposit insurance
assessments. As mandated by FDICIA, the FDIC adopted regulations
effective January 1, 1993 for the transition from a flat-rate
insurance assessment system to a risk-based system by January 1,
1994. Pursuant to these regulations, each Bank Subsidiary's
deposit insurance assessment is individually set within a range
of 0.23 percent to 0.31 percent of its qualifying deposits,
depending on the institution's risk classification. The new FDIC
assessment rates for the Bank Subsidiaries did not result in a
material increase in FDIC insurance premiums in 1993 compared to
1992.
Governmental Policies
The operations of Crestar and its subsidiaries are affected
not only by general economic conditions, but also by the policies
of various regulatory authorities. In particular, the Federal
Reserve Board regulates money and credit and interest rates in
order to influence general economic conditions. These policies
have a significant influence on overall growth and distribution
of loans, investments and deposits and affect interest rates
charged on loans or paid for time and savings deposits. Federal
Reserve Board monetary policies have had a significant effect on
the operating results of commercial banks in the past and are
expected to continue to do so in the future.
Various legislation, including proposals to overhaul the
banking regulatory system and to limit the investments that a
depository institution may make with insured funds are from time
to time introduced in Congress. Crestar cannot determine the
ultimate effect that such legislation (and any implementing
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regulations), if enacted, would have upon its financial condition
or operations.
DESCRIPTION OF CRESTAR CAPITAL STOCK
The capital stock of Crestar consists of 100,000,000 autho-
rized shares of Common Stock and 2,000,000 authorized shares of
Preferred Stock. The shares of Preferred Stock are issuable in
series, with relative rights, preferences and limitations of each
series fixed by Crestar's Board of Directors. The following
summary does not purport to be complete and is subject in all
respects to applicable Virginia law, Crestar's Restated Articles
of Incorporation and Bylaws, and the Rights Agreement dated
June 23, 1989 (described below) (the "Rights Agreement").
Common Stock
Crestar had 37,515,671 shares of Common Stock outstanding at
December 31, 1993. Each share of Common Stock is entitled to one
vote on all matters submitted to a vote of shareholders. Holders
of Common Stock are entitled to receive dividends when and as
declared by Crestar's Board of Directors out of funds legally
available therefor. Dividends may be paid on the Common Stock
only if all dividends on any outstanding Preferred Stock have
been paid or provided for.
The issued and outstanding shares of Common Stock are fully
paid and non-assessable. Holders of Common Stock have no preemp-
tive or conversion rights and are not subject to further calls or
assessments by Crestar.
In the event of the voluntary or involuntary dissolution,
liquidation or winding up of Crestar, holders of Common Stock are
entitled to receive, pro rata, after satisfaction in full of the
prior rights of creditors and holders of Preferred Stock, if any,
all the remaining assets of Crestar available for distribution.
Directors are elected by a vote of the holders of Common
Stock. Holders of Common Stock are not entitled to cumulative
voting rights.
Mellon Bank, N.A. acts as the transfer agent and registrar
for the Common Stock.
Preferred Stock
Crestar's Board of Directors is authorized to designate with
respect to each new series of Preferred Stock the number of
shares in each series, the dividend rates and dates of payment,
voluntary and involuntary liquidation preferences, redemption
prices, whether or not dividends shall be cumulative and, if
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cumulative, the date or dates from which the same shall be
cumulative, the sinking fund provisions, if any, for redemption
or purchase of shares, the rights, if any, and the terms and
conditions on which shares can be converted into or exchanged
for, or the rights to purchase, shares of any other class or
series, and the voting rights, if any. Any Preferred Stock
issued will rank prior to the Common Stock as to dividends and as
to distributions in the event of liquidation, dissolution or
winding up of Crestar. The ability of Crestar's Board of Direc-
tors to issue Preferred Stock, while providing flexibility in
connection with possible acquisitions and other corporate purpos-
es, could, among other things, adversely affect the voting powers
of holders of Common Stock and, under certain circumstances, may
discourage an attempt by others to gain control of Crestar.
Pursuant to Crestar's Restated Articles of Incorporation,
the Board of Directors has designated a series of 100,000 shares
of Participating Cumulative Preferred Stock, Series C (the
"Series C Preferred Stock"), none of the shares of which are
currently outstanding. The Series C Preferred Stock was created
in connection with Crestar's shareholder rights plan which is
described below.
Rights
In 1989, pursuant to the Rights Agreement, Crestar distrib-
uted as a dividend one Right for each outstanding share of Common
Stock. Each Right entitles the holder to buy one one-thousandth
of a share of Junior Preferred Stock at an exercise price of
$115, subject to adjustment. The Rights will become exercisable
only if a person or group acquires or announces a tender offer
for 10% or more of the outstanding Common Stock. When exercis-
able, Crestar may issue a share of Common Stock in exchange for
each Right other than those held by such person or group. If a
person or group acquires 30% or more of the outstanding Common
Stock, each Right will entitle the holder, other than the acquir-
ing person, upon payment of the exercise price, to acquire Series
C Preferred Stock or, at the option of Crestar, Common Stock,
having a value equal to twice the Right's exercise price. If
Crestar is acquired in a merger or other business combination or
if 50% of its earnings power is sold, each Right will entitle the
holder, other than the acquiring person, to purchase securities
of the surviving company having a market value equal to twice the
exercise price of the Right. The Rights will expire on June 23,
1999, and may be redeemed by Crestar at any time prior to the
tenth day after an announcement that a 10% position has been
acquired, unless such time period has been extended by the Board
of Directors.
Until such time as a person or group acquires or announces a
tender offer for 10% or more of the Common Stock, (i) the Rights
will be evidenced by the Common Stock certificates and will be
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transferred with and only with such Common Stock certificates,
and (ii) the surrender for transfer of any certificate for Common
Stock will also constitute the transfer of the Rights associated
with the Common Stock represented by such certificate. Rights
may not be transferred, directly or indirectly (i) to any person
or group that has acquired, or obtained the right to acquire,
beneficial ownership of 10% or more of the Rights (an "Acquiring
Person"), (ii) to any person in connection with a transaction in
which such person becomes an Acquiring Person or (iii) to any
affiliate or associate of any such person. Any Right that is the
subject of a purported transfer to any such person will be null
and void.
The Rights may have certain anti-takeover effects. The
Rights will cause substantial dilution to a person or group that
acquires more than 10% of the outstanding shares of Common Stock
of Crestar if certain events thereafter occur without the Rights
having been redeemed. However, the Rights should not interfere
with any merger or other business combination approved by the
Board of Directors and the shareholders because the Rights are
redeemable under certain circumstances.
Virginia Stock Corporation Act
The VSCA contains provisions governing "Affiliated Transac-
tions." These provisions, with several exceptions discussed
below, require approval of material acquisition transactions
between a Virginia corporation and any holder of more than 10% of
any class of its outstanding voting shares (an "Interested
Shareholder") by the holders of at least two-thirds of the
remaining voting shares. Affiliated Transactions subject to this
approval requirement include mergers, share exchanges, material
dispositions of corporate assets not in the ordinary course of
business, any dissolution of the corporation proposed by or on
behalf of an Interested Shareholder, or any reclassification,
including reverse stock splits, recapitalization or merger of the
corporation with its subsidiaries which increases the percentage
of voting shares owned beneficially by an Interested Shareholder
by more than 5%.
For three years following the time that an Interested
Shareholder becomes an owner of 10% of the outstanding voting
shares, a Virginia corporation cannot engage in an Affiliated
Transaction with such Interested Shareholder without approval of
two-thirds of the voting shares other than those shares benefi-
cially owned by the Interested Shareholder, and majority approval
of the "Disinterested Directors." A Disinterested Director means,
with respect to a particular Interested Shareholder, a member of
Crestar's Board of Directors who was (1) a member on the date on
which an Interested Shareholder became an Interested Shareholder
and (2) recommended for election by, or was elected to fill a
vacancy and received the affirmative vote of, a majority of the
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Disinterested Directors then on the Board. At the expiration of
the three year period, the statute requires approval of Affiliat-
ed Transactions by two-thirds of the voting shares other than
those beneficially owned by the Interested Shareholder.
The principal exceptions to the special voting requirement
apply to transactions proposed after the three year period has
expired and require either that the transaction be approved by a
majority of the corporation's Disinterested Directors or that the
transaction satisfy the fair-price requirements of the statute.
In general, the fair-price requirement provides that in a two-
step acquisition transaction, the Interested Shareholder must pay
the shareholders in the second step either the same amount of
cash or the same amount and type of consideration paid to acquire
the Virginia corporation's shares in the first step.
None of the foregoing limitations and special voting re-
quirements applies to a transaction with an Interested Sharehold-
er whose acquisition of shares making such person an Interested
Shareholder was approved by a majority of the Virginia corporati-
on's Disinterested Directors.
These provisions were designed to deter certain takeovers of
Virginia corporations. In addition, the statute provides that,
by affirmative vote of a majority of the voting shares other than
shares owned by any Interested Shareholder, a corporation can
adopt an amendment to its articles of incorporation or bylaws
providing that the Affiliated Transactions provisions shall not
apply to the corporation. Crestar has not "opted out" of the
Affiliated Transactions provisions.
Virginia law also provides that shares acquired in a trans-
action that would cause the acquiring person's voting strength to
meet or exceed any of three thresholds (20%, 331/3% or 50%) have
no voting rights unless granted by a majority vote of shares not
owned by the acquiring person or any officer or employee-director
of the Virginia corporation. This provision empowers an acquir-
ing person to require the Virginia corporation to hold a special
meeting of shareholders to consider the matter within 50 days of
its request.
COMPARATIVE RIGHTS OF SHAREHOLDERS
At the Effective Time of the Holding Company Merger, AB
shareholders (except any AB shareholder properly exercising the
right to an appraisal or electing the cash option) automatically
will become shareholders of Crestar, and their rights as share-
holders will be determined by Crestar's Articles of Incorporation
and Bylaws. The following is a summary of the material differ-
ences in the rights of shareholders of Crestar and AB.
Capitalization
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AB. AB's Articles authorize the issuance of up to 3,000,000
shares of AB Common Stock, par value $1 per share, of which
1,206,500 shares were issued and outstanding as of the Record
Date, and up to 2,000,000 shares of preferred stock, par value
$100 per share. AB preferred stock is issuable in series, each
having such rights and preferences as AB's Board of Directors
may, by adoption of an amendment of AB's Certificate of Incorpo-
ration, fix and determine. As of the Record Date, no shares of
AB preferred stock were issued and outstanding.
Crestar. Crestar's authorized capital is set forth under
"Description of Crestar Capital Stock."
Amendment of Articles or Bylaws
AB. As permitted by the DGCL, AB's Certificate of Incorpo-
ration provides that, unless a greater vote is required by law,
by the Certificate of AB or by a resolution of the Board of
Directors, AB's Certificate may be amended if the amendment is
adopted by the Board of Directors and approved by a vote of the
holders of a majority of the votes entitled to be cast on the
amendment by each voting group entitled to vote thereon. The
Certificate providing for a classified Board of Directors and
establishing criteria for removing Directors requires (i) the
affirmative vote of 80% or more of the votes entitled to be cast
on the amendment, (ii) and an Independent Majority of Sharehold-
ers, which generally is defined to mean the holders of a majority
of the outstanding voting shares that generally are not owned or
controlled by a Related Person, which generally is defined as a
beneficial owner of 15% or more of the voting shares of AB.
AB's Bylaws generally provide that the AB Board may amend
its Bylaws either by (i) the affirmative vote of both 80% or more
of the Whole Board of Directors, which is defined as the total
number of directors which AB would have if there were no vacan-
cies, and a majority of the Continuing Directors (as defined in
the Certificate of Incorporation), or (ii) the alternative vote
of the holders of 80% or more of the votes entitled to be cast,
voting separately as a class, and the affirmative vote of both
80% of the Whole Board of Directors and a majority of the Contin-
uing Directors.
Crestar. As permitted by the VSCA, Crestar's Articles
provide that, unless a greater vote is required by law, by the
Articles of Crestar or by a resolution of the Board of Directors,
Crestar's Articles may be amended if the amendment is adopted by
the Board of Directors and approved by a vote of the holders of a
majority of the votes entitled to be cast on the amendment by
each voting group entitled to vote thereon. The Article provid-
ing for a classified Board of Directors and establishing criteria
for removing Directors requires the approving vote of a majority
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of "Disinterested Directors" and the holders of at least two-
thirds of the votes entitled to be cast on the amendment.
Crestar's Bylaws generally provide that the Board of Direc-
tors may, by a majority vote, amend its Bylaws.
Required Shareholder Vote for Certain Actions
AB. Each share of AB Common Stock has the same relative
rights and is identical in all respects with every other share of
AB Common Stock. The holders of AB Common Stock possess exclu-
sive voting rights in AB, except to the extent that outstanding
shares of AB preferred stock may have voting rights. Each holder
of AB Common Stock is entitled to one vote for each share held of
record on all matters submitted to a vote of holders of AB Common
Stock, except as described below, and does not have cumulative
voting rights in the election of Directors.
Generally, the affirmative vote of not less than 80% of the
outstanding Voting Shares, voting separately as a class, and an
Independent Majority of Shareholders, is required to approve a
"Business Combination", generally defined in the Certificate of
Incorporation to include a transaction, such as (1) a merger or
consolidation with a shareholder that is the beneficial owner,
directly or indirectly, of more than 15% of the voting power of
the outstanding common stock ("Related Person"), (2) the sale,
exchange, lease, transfer or other disposition of AB assets to
a Related Person, (3) the purchase, exchange, lease or other
acquisition by AB of the assets of a Related Person, (4) any
reclassification of securities, recapitalization or other trans-
action which directly or indirectly will increase the proportion-
ate amount of Voting Shares of AB which are beneficially owned by
a Related Person, or (5) any partial or complete liquidation,
spinoff, splitoff or splitup of AB.
Crestar. The VSCA generally requires the approval of a
majority of a corporation's Board of Directors and the holders of
more than two-thirds of all the votes entitled to be cast thereon
by each voting group entitled to vote on any plan of merger or
consolidation, plan of share exchange or sale of substantially
all of the assets of a corporation not in the ordinary course of
business. The VSCA also specifies additional voting requirements
for Affiliated Transactions and transactions that would cause an
acquiring person's voting power to meet or exceed specified
thresholds, as discussed under "Description of Crestar Capital
Stock -- Virginia Stock Corporation Act."
None of the additional voting requirements contained in the
AB Certificate of Incorporation or the VSCA are applicable to the
Holding Company Merger.
Director Nominations
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AB. The Certificate of Incorporation of AB require that
shareholder nominations of persons for election as a director of
AB be received in writing by the Secretary no less than 20 days
prior to any meeting of the shareholders called for the election
of directors; provided, however, that in the event less than 30
days' notice of the meeting is given to shareholders, nominations
made by shareholders must be delivered or mailed to the Secretary
no later than the tenth day following the day on which such
notice of the date of the meeting was mailed. Such nominations
shall set forth (i) the name, age and business and residence
address of the nominee and the shareholder making the nomination;
(ii) the occupation of the nominee; (iii) the number of Voting
Shares owned of record by the shareholder making the nomination
and by the nominee; and (iv) the consent of the nominee to serve
if elected.
Crestar. The Bylaws of Crestar provide that any nomination
for director made by a shareholder must be made in writing to the
Secretary of Crestar not less than 15 days prior to the meeting
of shareholders at which directors are to be elected. If mailed,
such notice shall be sent by certified mail, return receipt
requested, and shall be deemed to have been given when received
by the Secretary of Crestar. A shareholder's nomination for
director shall set forth (a) the name and business address of the
shareholder's nominee, (b) the fact that the nominee has consent-
ed to his name being placed in nomination, (c) the name and
address, as they appear on Crestar's books, of the shareholder
making the nomination, (d) the class and number of shares of
Crestar's stock beneficially owned by the shareholder, and
(e) any material interest of the shareholder in the proposed
nomination.
Directors and Classes of Directors; Vacancies and Removal of
Directors
AB. The Certificate of Incorporation of AB provides that
the Board of Directors of AB shall be divided into three classes
as nearly equal in number as possible and that one class of
directors shall be elected annually for three-year terms and
until their successors are elected and qualified.
The Bylaws of AB provide that the number of directors shall
be determined in accordance with the Certificate of Incorporation
and shall consist of nine members. The Certificate of Incorpora-
tion of AB provides that the number of directors shall in no case
be less than eight and no greater than fifteen, except when a
greater number is approved by the Board of Directors. Directors
are divided into three classes so that each director serves for a
term ending on the date of the third annual meeting following the
annual meeting at which such director was elected.
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Any vacancy occurring on the Board of Directors may be
filled by the Board of Directors, acting by vote of 80% of the
directors then in office, although less than a quorum. Any
director so elected to fill a vacancy shall be elected to serve
until the next succeeding annual election of directors and until
such director's successor shall have been elected and qualified.
At a meeting of shareholders called expressly for that
purpose, a director may be removed for cause upon a vote of the
holders of 80% or more of the outstanding shares then entitled to
vote, voting separately as a class, and an Independent Majority
of Shareholders at an election of directors.
Crestar. Crestar's Articles provide that the number of
Directors shall be set forth in the Bylaws, but the number of
directors set forth in the Bylaws may not be increased by more
than four during any 12-month period except by the affirmative
vote of more than two-thirds of the votes entitled to be cast.
The Bylaws provide for a Board of Directors consisting of not
less than five nor more than 26 members, with the number to be
fixed by the Board. The Board currently has fixed the number of
directors at 19. Crestar's Board of Directors is divided into
three classes, each as nearly equal in number as possible, with
one class being elected annually.
The Articles of Incorporation of Crestar provide that any
vacancy occurring on the Board of Directors, including a vacancy
resulting from an increase in the number of Directors, may be
filled by the affirmative vote of a majority of the remaining
directors, though less than a quorum of the Board of Directors.
If at the time any such vacancy is filled, any person, or any
associate or affiliate of such person (as those terms are defined
in Rule 12b-2 of the General Rules and Regulations under the
Exchange Act, or any successor rule or regulation) is directly or
indirectly the beneficial owner of 10% (or more) of outstanding
voting shares, the vacancy shall be filled by the affirmative
vote of a majority of the remaining directors in the class of
directors in which the vacancy has occurred. Directors so chosen
shall hold office for a term expiring at the next following
annual meeting of shareholders at which directors are elected.
No decrease in the number of directors constituting the Board of
Directors shall shorten the term of any incumbent director.
Subject to the rights of the holders of preferred stock then
outstanding, any director may be removed, with cause, only by the
affirmative vote of the holders of at least two-thirds of out-
standing voting shares.
Anti-Takeover Provisions
AB. The provisions of AB's Bylaws and Certificate of
Incorporation providing for classification of the Board of
-97-
Directors into three separate classes, limiting voting rights of
certain shareholders and requiring super-majority approval of
certain business combinations and amendments to the Certificate
of Incorporation and Bylaws, and Section 203 ("Section 203") of
the DGCL may have certain anti-takeover effects. The provisions
of the Certificate of Incorporation and Bylaws may prevent
consummation of a transaction opposed by the Board of Directors,
even if favored by holders of a majority of AB Common Stock, and
may tend to entrench management.
The provisions of Section 203 would prohibit a "Business
Combination" (as defined in Section 203, generally including
mergers, sales and leases of assets, issuances of securities, and
similar transactions) by AB or a subsidiary with an "Interested
Shareholder" (as defined in Section 203, generally the beneficial
owner of 15% or more of AB Common Stock) within three years after
the person or entity becomes an Interested Shareholder, unless
(i) prior to the person or entity becoming an Interested Share-
holder, the Business Combination or the transaction pursuant to
which such person or entity became an Interested Shareholder
shall have been approved by AB's Board of Directors, (ii) upon
consummation of the transaction in which he became an Interested
Shareholder, the Interested Shareholder holds at least 85% of AB
Common Stock (excluding shares held by persons who are both
officers and directors and shares held by certain employee
benefit plans), or (iii) the Business Combination is approved by
AB Common Stock, excluding shares owned by the Interested Share-
holder.
One of the effects of Section 203 may be to prevent highly
leveraged takeovers, which depend upon access to the acquired
corporation's assets to support or repay the debt and to prevent
certain coercive acquisition tactics. By requiring approval of
the holders of two-thirds of the shares held by disinterested
shareholders for Business Combinations involving an Interested
Shareholder, the provisions of Section 203 may prevent any
Interested Shareholder from taking advantage of its position as a
substantial, if not controlling, shareholder and engaging in
transactions with AB that may not be fair to AB's other share-
holders or that may otherwise not be in the best interests of AB,
its shareholders, and other constituencies.
For similar reasons, however, these provisions may make more
difficult or discourage an acquisition of AB, or the acquisition
of control of AB by a principal shareholder, and thus the removal
of incumbent management, since a business combination within the
specified three-year period that is not approved by a majority of
the Board of Directors prior to the transaction in which a person
becomes an Interested Shareholder will require the approval of
the Board of Directors and the holders of two-thirds of the
shares held by disinterested shareholders. In addition, to the
extent that Section 203 discourages takeovers that would result
-98-
in the change of AB's management, such a change may be less
likely to occur. Because Crestar is not an Interested Sharehold-
er, the provisions of Section 203 do not apply to the Holding
Company Merger.
Crestar. For a description of certain provisions of VSCA
which may be deemed to have an anti-takeover effect, see "De-
scription of Crestar Capital Stock -- Virginia Stock Corporation
Act."
Preemptive Rights
Neither the shareholders of Crestar nor the shareholders of
AB have preemptive rights. Thus, if additional shares of Crestar
Common Stock, Crestar preferred stock or AB Common Stock are
issued, holders of such stock, to the extent they do not partici-
pate in such additional issuance of shares, would own proportion-
ately smaller interests in a larger amount of outstanding capital
stock.
Assessment
All shares of Crestar Common Stock presently issued are, and
those to be issued pursuant to the Agreement will be, fully paid
and nonassessable.
All outstanding shares of AB Common Stock are deemed to be
fully paid and nonassessable.
Conversion; Redemption; Sinking Fund
Neither Crestar Common Stock nor AB Common Stock is convert-
ible, redeemable or entitled to any sinking fund.
Liquidation Rights
AB. In the event of the complete liquidation or dissolution
of AB, the holders of AB Common Stock are entitled to receive all
assets of AB available for distribution in cash or in kind, after
payment or provision for payment of (i) all debts and liabilities
of AB (including all savings accounts and accrued interest
thereon); (ii) any accrued dividend claims; and (iii) liquidation
preferences upon serial preferred stock which may be issued in
the future.
Crestar. The VSCA generally provides that a corporation's
board of directors may propose dissolution for submission to
shareholders and that to be authorized dissolution must be
approved by the holders of more than two-thirds of all votes
entitled to be cast on the proposal, unless the articles of
incorporation of the corporation require a greater or lesser
vote. There are no provisions in the Articles of Incorporation
-99-
of Crestar which would modify the statutory requirements for
dissolution under the VSCA.
Dividends and Other Distributions
AB. The DGCL provides that, subject to any restrictions in
AB's Certificate of Incorporation, dividends may be declared from
AB's surplus or, if there is no surplus, from its net profits for
the fiscal year in which the dividend is declared and the preced-
ing fiscal year. However, if AB's capital (generally defined in
the DGCL as the sum of the aggregate par value of all shares of
AB's capital stock, where all such shares have a par value and
the board of directors has not established a higher level of
capital) has been diminished to an amount less than the aggregate
amount of the capital represented by the issued and outstanding
stock of all classes having a preference upon the distribution of
assets, dividends may not be declared and paid out of such net
profits until the deficiency in such capital has been repaired.
Crestar. The VSCA generally provides that a corporation may
make distributions to its shareholders unless, after giving
effect to the distribution, (i) the corporation would not be able
to pay its debts as they become due in the usual course of
business or (ii) the corporation's total assets would be less
than the sum of its total liabilities plus (unless the articles
of incorporation permit otherwise, which in the case of AB and
Crestar they do not) the amount that would be needed, if the
corporation were to be dissolved at the time of the distribution,
to satisfy the preferential rights upon dissolution of sharehold-
ers whose preferential rights are superior to those receiving the
distribution. These requirements are applicable to both Crestar
and AB as Virginia corporations.
In addition to the limitations set forth in the VSCA, there
are various regulatory requirements which are applicable to
distributions by bank holding companies such as Crestar and
savings and loan holding companies such as AB. For a description
of the regulatory limitations on distributions by Crestar, see
"Supervision and Regulation -- Limits on Dividends and Other
Payments."
Special Meetings of Shareholders
AB. The Bylaws of AB provide that special meetings of
shareholders may be called by the Chairman of the Board of
Directors or the President of AB and only such other persons as
are specifically permitted to call special meetings by the DGCL.
Crestar. The Bylaws of Crestar provide that special meet-
ings of the shareholders for any purpose or purposes may be
called at any time by the Chairman of the Board of Directors, by
the President, or by a majority of the Board of Directors.
- -100-
Indemnification
AB. The Bylaws of AB provide that to the full extent
permitted by the DGCL, AB shall indemnify a director or officer
of AB who is or was a party to any proceeding by reason of the
fact that he is or was such a director or officer or is or was
serving at the request of AB as a director, officer, employee or
agent of another corporation, partnership, joint venture, trust
or other enterprise.
Crestar. The Articles of Incorporation of Crestar provide
that to the full extent permitted by the VSCA and any other
applicable law, Crestar shall indemnify a director or officer of
Crestar who is or was a party to any proceeding by reason of the
fact that he is or was such a director or officer or is or was
serving at the request of the corporation, partnership, joint
venture, trust, employee benefit plan or other enterprise. The
Board of Directors is empowered, by majority vote of a quorum of
disinterested directors, to contract in advance to indemnify any
director or officer.
Shareholder Proposals
AB. The Bylaws of AB provide that any new business to be
considered at the annual meeting must be submitted in writing and
filed with the Secretary of AB at least five days before the date
of the meeting.
Crestar. The Bylaws of Crestar provide that at any meeting
of shareholders of Crestar, only that business that is properly
brought before the meeting may be presented to and acted upon by
the shareholders. To be properly brought before the meeting,
business must be brought (a) by or at the direction of the Board
of Directors or (b) by a shareholder who has given written notice
of business he expects to bring before the meeting to the
Secretary of Crestar not less than 15 days prior to the meeting.
If mailed, such notice shall be sent by certified mail, return
receipt requested, and shall be deemed to have been given when
received by the Secretary of Crestar. A shareholder's notice to
the Secretary shall set forth as to each matter the shareholder
proposes to bring before the meeting (a) a brief description of
the business to be brought before the meeting and the reasons for
conducting such business at the meeting, (b) the name and
address, as they appear on Crestar's books, of the shareholder
proposing such business, (c) the class and number of shares of
Crestar's stock beneficially owned by the shareholder, and (d)
any material interest of the shareholder in such business. No
business shall be conducted at a meeting of shareholders except
in accordance with the procedures set forth in Crestar's Bylaws.
Shareholder Inspection Rights; Shareholder Lists
- -101-
AB. Under the DGCL, the shareholders of a Delaware
corporation have substantially similar rights as those described
below for shareholders of Virginia corporations.
Crestar. The Certificate of Incorporation and Bylaws of AB
and the Articles of Incorporation and Bylaws of Crestar do not
contain any provisions which govern shareholder inspection rights
or shareholder lists. Under the VSCA, the shareholder of a
Virginia corporation is entitled to inspect and copy certain
books and records of the corporation, including a list of
shareholders, if (i) the shareholder has been a shareholder of
record for at least six months immediately preceding his or her
written demand or is the holder of at least 5% of the
corporation's outstanding shares, (ii) the shareholder's demand
is made in good faith and for a proper purpose, (iii) the
shareholder describes with reasonable particularity the purpose
of the request and the records desired to be inspected and (iv)
the records are directly connected with the stated purpose. The
VSCA also provides that a corporation shall make available for
inspection by any shareholder during usual business hours, at
least 10 days before each meeting of shareholders, a complete
list of the shareholders entitled to vote at such meeting.
Shareholder Rights Plan
AB. AB does not have a shareholders' rights plan.
Crestar. For a description of a shareholder rights
agreement which has been adopted by Crestar, see "Description of
Crestar Capital Stock -- Rights."
Dissenters' Rights
AB. For a discussion of AB shareholders' rights of
appraisal under the DGCL, see "THE HOLDING COMPANY MERGER --
Rights of Shareholders Electing to Exercise Their Rights of
Appraisal."
Crestar. The provisions of Article 15 of the VSCA which
provide shareholders of a Virginia corporation the right to
dissent from, and obtain payment of the fair value of his shares
in the event of, mergers, consolidations and certain other
corporate transactions are applicable to both Crestar and AB as
Virginia corporations. However, because Crestar has more than
2,000 record shareholders, unlike AB, shareholders of Crestar are
less likely to have rights to dissent from mergers,
consolidations and certain other corporate transactions to which
Crestar is a party because Article 15 of the VSCA provides that
holders of shares of a Virginia corporation which has shares
listed on a national securities exchange or which has at least
2,000 record shareholders are not entitled to dissenters' rights
unless certain requirements are met. For additional information
- -102-
in this regard, see "The Holding Company Merger -- Rights of
Shareholders Electing to Exercise Their Right of Appraisal."
- -103-
RESALE OF CRESTAR COMMON STOCK
Crestar Common Stock has been registered under the
Securities Act, thereby allowing such shares to be traded freely
and without restriction by those holders of AB Common Stock who
receive such shares following consummation of the Holding Company
Merger and who are not deemed to be "affiliates" (as defined
under the Securities Act, but generally including directors,
certain executive officers and 10% or more shareholders) of AB or
Crestar. The Agreement provides that each holder of AB Common
Stock who is deemed by AB to be an affiliate of it will enter
into an agreement with Crestar prior to the Effective Date of the
Holding Company Merger providing, among other things, that such
affiliate will not transfer any Crestar Common Stock received by
such holder in the Holding Company Merger except in compliance
with the Securities Act. This Proxy Statement/Prospectus does
not cover any resales of Crestar Common Stock received by
affiliates of AB.
EXPERTS
The consolidated financial statements of Crestar Financial
Corporation and Subsidiaries incorporated in this Proxy
Statement/Prospectus by reference to Crestar's Annual Report on
Form 10-K for the year ended December 31, 1992 have been so
incorporated in reliance upon the report of KPMG Peat Marwick,
independent auditors, incorporated herein by reference, and upon
the authority of said firm as experts in accounting and auditing.
The consolidated financial statements of AB as of
September 30, 1993 and 1992, and for each of the three years in
the period ended September 30, 1993, included in this Proxy
Statement/Prospectus have been audited by Deloitte & Touche,
independent auditors, as stated in their report appearing herein,
and have been so included in reliance upon the report of such
firm given upon their authority as experts in accounting and
auditing.
LEGAL OPINION
The legality of the Crestar Common Stock to be issued in the
Holding Company Merger will be passed on for Crestar by Hunton &
Williams, Richmond, Virginia. Gordon F. Rainey, Jr., a partner
in Hunton & Williams, is a director of Crestar.
A condition to consummation of the Holding Company Merger is
the delivery by Hunton & Williams, counsel for Crestar, of an
opinion to Crestar concerning certain federal income tax
consequences of the Transaction. See "The Holding Company
Merger -- Certain Federal Income Tax Consequences."
- -104-
ANNAPOLIS BANCORP, INC. AND SUBSIDIARY
TABLE OF CONTENTS
Page
Independent Auditors' Report F-1
Consolidated Statements of Financial Condition as of
September 30, 1993 and 1992 F-2
Consolidated Statements of Operations for the Years Ended
September 30, 1993, 1992, and 1991 F-3
Consolidated Statements of Stockholders' Equity for the
Years Ended September 30, 1993, 1992, and 1991 F-4
Consolidated Statements of Cash Flows for the Years Ended
September 30, 1993, 1992, and 1991 F-5
Notes to Consolidated Financial Statements F-7-26
Schedules have been omitted because they are inapplicable or the information
is provided elsewhere in the consolidated financial statements and notes
thereto.
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of
Annapolis Bancorp, Inc.
We have audited the accompanying consolidated statements of
financial condition of Annapolis Bancorp, Inc. and subsidiary as of September
30, 1993 and 1992, and the related consolidated statements of operations,
stockholders' equity, and cash flows for each of the three years in the period
ended September 30, 1993. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion
on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present
fairly, in all material respects, the financial position of the companies at
September 30, 1993 and 1992, and the results of their operations and their cash
flows for each of the three years in the period ended September 30, 1993 in
conformity with generally accepted accounting principles.
As discussed in Note 1 to the consolidated financial statements,
during the year ended September 30, 1992 the Company changed its method of
accounting for income taxes to conform with Statement of Financial Accounting
Standards No. 109.
DELOITTE & TOUCHE
Washington, DC
November 16, 1993
-F-1-
ANNAPOLIS BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
SEPTEMBER 30, 1993 AND 1992
ASSETS 1993 1992
ASSETS:
Cash and cash equivalents $15,373,892 $20,783,319
Investment securities, (estimated
market value of $25,059,300 in 1993;
$16,366,300 in 1992) 24,744,657 15,825,827
Mortgage-backed and related securities,
(estimated market value of $41,897,000
in 1993; $44,956,000 in 1992) 40,720,621 43,187,059
Loans receivable 218,875,760 241,625,270
Less allowance for loan losses (2,900,825) (3,200,174)
Loans receivable, net 215,974,935 238,425,096
Accrued interest receivable 2,661,996 3,391,716
Real estate acquired through foreclosure 10,617,673 14,182,798
Real estate held for development and sale 40,339 1,367,089
Investments in and loans to joint ventures 894,401 2,091,819
Property and equipment, net 10,940,655 11,118,362
Prepaid expenses and other assets 1,938,006 1,805,646
Income tax refund receivable 820,000 1,549,000
Deferred income tax benefit 300,000
TOTAL ASSETS $325,027,175 $353,727,731
See notes to consolidated financial statements.
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Deposits $288,076,984 $310,710,595
Advances from Federal Home Loan Bank 7,006,328 8,010,844
Bonds payable 9,622,230 14,745,082
Notes payable 7,302,041 7,302,041
Amounts due first lienholders -- 1,044,003
Advances from borrowers for taxes and insurance 482,784 339,459
Accrued expenses and other liabilities 1,796,644 1,657,244
Income taxes - deferred -- 168,844
Deferred income 231,533 197,778
Total liabilities 314,518,544 344,175,890
Commitments and contingencies
Stockholders' Equity:
Preferred stock - $100.00 par
value (authorized, 2,000,000 shares;
none issued)
Common stock - $1.00 par value (authorized,
3,000,000 shares; issued and outstanding,
1,205,500 shares in both, 1993 and 1992) 1,205,500 1,205,500
Additional paid-in capital 3,314,500 3,314,500
Retained earnings - substantially restricted 5,988,631 5,031,841
Total stockholders' equity 10,508,631 9,551,841
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $325,027,175 $353,727,731
-F-2-
<TABLE>
ANNAPOLIS BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED SEPTEMBER 30, 1993, 1992, AND 1991
1993 1992 1991
<S> <C> <C> <C>
INTEREST INCOME:
Interest on loans $20,081,573 $23,855,218 $28,814,622
Interest on mortgage-backed
securities 2,716,857 3,787,679 4,311,269
Interest and dividends on
investment securities 2,031,091 1,935,276 2,496,331
Total interest income 24,829,521 29,578,173 35,622,222
INTEREST EXPENSE:
Interest on deposits 12,374,976 17,667,628 22,823,902
Interest on borrowings 2,501,397 3,507,509 3,826,914
Total interest expense 14,876,373 21,175,137 26,650,816
NET INTEREST INCOME BEFORE PROVISION
FOR LOAN LOSSES 9,953,148 8,403,036 8,971,406
PROVISION FOR LOAN LOSSES 155,618 5,931,293 230,000
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 9,797,530 2,471,743 8,741,406
OTHER INCOME:
Loan servicing fees 366,987 446,064 574,055
Bank service charges and fees 277,273 267,443 300,189
Gain (loss) on sale of investments,
net (60,788) 23,749
Gain (loss) on sale of loans 146,124 (111,879) (141,530)
Equity in earnings (losses) of
affiliates (240,256) (55,943) 6,429
Gain on sale joint venture interest 80,000 40,000
Other 212,468 774,150 301,691
Total other income 762,596 1,339,047 1,104,583
OTHER EXPENSES:
Compensation and related benefits 4,438,981 4,377,570 4,437,500
Occupancy and equipment 1,463,981 1,575,688 1,460,420
Federal insurance premiums 793,616 716,284 708,066
Loss from real estate operations,
net 293,550 132,525 101,792
Professional fees 417,845 295,928 177,660
Other 1,797,363 1,674,564 1,867,025
Total other expenses 9,205,336 8,772,559 8,752,463
INCOME (LOSS) BEFORE INCOME TAXES 1,354,790 (4,961,769) 1,093,526
INCOME TAXES (BENEFIT):
Current 662,000 (1,233,000) 695,000
Deferred (264,000) (861,000) (160,000)
Total income taxes (benefit) 398,000 (2,094,000) 535,000
NET INCOME (LOSS) $ 956,790 ($2,867,769) $ 558,526
<FN>
See notes to consolidated financial statements.
</TABLE>
-F-3-
-F-4-
<TABLE>
ANNAPOLIS BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED SEPTEMBER 30, 1993, 1992, AND 1991
Unrealized
Loss on
Capital Stock Additional Marketable
Number of Paid-In Equity Retained Total
Shares Amount Capital Securities Earnings Equity
<S> <C> <C> <C> <C> <C> <C>
BALANCE,
OCTOBER 1, 1990 1,000,000 $1,000,000 $1,500,000 $(432,509) $7,341,084 $ 9,408,575
Net income 558,526 558,526
Decrease in unrealized
loss on
marketable equity
securities 245,930 245,930
Sale of common stock 205,500 205,500 1,814,500 2,020,000
BALANCE, SEPTEMBER 30,
1991 1,205,500 1,205,500 3,314,500 (186,579) 7,899,610 12,233,031
Net loss (2,867,769) (2,867,769)
Decrease in unrealized
loss on marketable
equity securities 186,579 186,579
BALANCE, SEPTEMBER 30,
1992 1,205,500 1,205,500 3,314,500 5,031,841 9,551,841
Net income 956,790 956,790
BALANCE, SEPTEMBER 30,
1993 1,205,500 $1,205,500 $3,314,500 $ $5,988,631 $10,508,631
<FN>
See notes to consolidated financial statements.
</TABLE>
<TABLE>
ANNAPOLIS BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED SEPTEMBER 30, 1993, 1992, AND 1991
1993 1992 1991
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) $956,790 ($2,867,769) $558,526
Adjustments to reconcile net
income to net cash
provided by operating activities:
Provision for loan losses 155,618 5,931,293 230,000
Provision for depreciation 663,203 642,943 517,198
Amortization of premiums and
discounts 138,457 (36,898) 17,946
Amortization of bond issuance costs 57,247 43,578 43,578
Amortization of conversion accounting
adjustments 420,000 525,000 600,064
(Gain) loss on sale of loans (146,124) 111,879 141,530
(Gain) loss on sale of investments 60,788 (23,749)
(Gain) loss on foreclosed real estate,
net (473,536) (135,893) (144,373)
(Gain) loss on disposal of property
and equipment 7,508 59,836 (3,267)
Equity in (earnings) losses of joint
ventures 240,256 55,943 (6,429)
(Increase) decrease in:
Prepaid expenses and other assets (132,360) (492,295) 262,728
Income tax refund receivable 729,000 (1,208,000) 162,000
Accrued interest receivable 729,720 1,401,833 136,375
Increase (decrease) in:
Deferred loan fees 82,852 44,819 (69,551)
Deferred income 33,755 19,439 49,010
Deferred income taxes (468,844) (811,156) (160,000)
Accrued expenses and other liabilities 139,400 (118,774) 34,745
Net cash provided by operating
activities 3,132,942 3,226,566 2,346,331
INVESTING ACTIVITIES:
Proceeds from sale of marketable
equity securities 4,307,625 500,035
Purchase of investments (30,000,000) (10,500,000)(31,539,100)
Proceeds from maturities of
investments 21,000,000 14,800,000 19,789,838
Proceeds from sales of investments 5,679,519
Principal repayments and
sales of mortgage-
backed securities 14,382,263 12,568,849 7,015,638
Purchase of mortgage backed
securities (11,960,000) (5,856,802) (2,774,884)
Loans originated and purchased (47,004,000) (67,931,000) (66,448,241)
Principal repayments of loans 50,951,848 54,744,284 58,232,256
Proceeds from sale of loans 17,392,283 19,846,000 14,834,470
Net cash receipts and disbursements from joint
venture transactions 966,608 253,241 737,107
Proceeds from sales of real estate held for
development and sale 1,218,000 -- 9,104
-F-6-
(continued)
- -F-7-
ANNAPOLIS BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED SEPTEMBER 30, 1993, 1992, AND 1991
1993 1992 1991
Purchase of real estate held
for development and sale (803) (2,520) (42,787)
Net proceeds from the sale of
foreclosed real estate 4,847,261 1,807,110 2,022,072
Purchase of property and
equipment, net (579,951) (561,289) (1,367,333)
Net cash provided by investing
activities 21,213,509 23,475,498 6,647,694
FINANCING ACTIVITIES:
Net increase in demand and
savings deposits 11,290,202 31,124,051 7,204,834
Net decrease in certificates
of deposit (33,923,813) (41,521,496) (12,395,627)
Repayments of borrowings
to FHLB (1,000,000) (3,000,000)
Repayments on note payable (7,971) (10,118)
Repayments of amounts due first
lienholders (1,044,003) (550,591) (489,867)
Increase (decrease) in advances
from borrowers 143,325 (532,657) (356,755)
Proceeds from sale of stock 2,020,000
Repayments of bonds payable (5,221,589) (4,461,925) (2,562,459)
Net cash used in financing
activities (29,755,878) (15,950,589) (9,589,992)
(DECREASE) INCREASE IN CASH
AND CASH EQUIVALENTS (5,409,427) 10,751,475 (595,967)
CASH AND CASH EQUIVALENTS, 20,783,319 10,031,844 10,627,811
BEGINNING OF YEAR
CASH AND CASH EQUIVALENTS,
END OF YEAR $15,373,892 $20,783,319 $10,031,844
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION:
Interest paid $14,907,393 $20,684,137 $26,650,816
Income taxes paid $ 325,000 $ 500,000
NON-CASH TRANSACTIONS:
Exchange of mortgage loans
for mortgage-backed
securities $ 2,637,000
Foreclosure of mortgage loans$ 622,820 $13,305,000 $ 6,284,000
<FN>
See notes to consolidated financial statements.
</TABLE>
-F-8-
-F-9-
ANNAPOLIS BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 1993, 1992, AND 1991
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation and Consolidation - The consolidated
financial statements of Annapolis Bancorp, Inc. and
subsidiary (the Company) are prepared in accordance with
generally accepted accounting principles.
The Company's consolidated financial statements include the
accounts of Annapolis Bancorp, Inc., Annapolis Federal
Savings Bank (AFSB), AFSB's wholly-owned subsidiaries,
Annapolis Federal Funding Corporation I (AFFC I) and
Maryland Service Corporation (MSC), and MSC's wholly-owned
subsidiaries, Maryland Service Insurance Corporation and
Maryland Service Development Corporation. All significant
intercompany transactions and balances have been eliminated
in consolidation.
Investments in joint ventures are accounted for using the
equity method.
Investment, Mortgage-Backed and Related Securities -
Investment, mortgage-backed and related securities are
recorded at amortized cost as management has the intention
and ability to hold these securities to maturity. Premiums
and discounts are amortized using a method which produces
results which are not materially different than the interest
method over the period remaining to maturity. Should sales
of such securities occur as a result of unforeseen
circumstances, gains and losses are reflected in operations
at the time of sale based on the carrying value of the
specific securities sold.
Loans Receivable Held for Sale - Loans receivable held for
sale are carried at the lower of cost (remaining principal
net of unearned discounts) or market determined in the
aggregate.
Real Estate Acquired Through Foreclosure - Real estate
acquired through foreclosure or deed in lieu of foreclosure,
and properties classified as in-substance foreclosed, are
recorded at the fair value of the real estate at the date of
foreclosure. Subsequent to the date of foreclosure such
real estate is carried at the lower of fair value or cost.
Properties classified as in-substance foreclosed consist of
loans accounted for as foreclosed property even though
actual foreclosure has not occurred. Although the
collateral underlying these loans has not been repossessed,
the borrower has little or no equity in the collateral at
its current estimated fair value, proceeds for repayment are
expected to come only from operation or sale of the
-F-10-
collateral and either the borrower has abandoned control of
the project or it is doubtful the borrower will rebuild
equity in the collateral in the foreseeable future. Costs
of foreclosure and direct holding costs are charged to
expense; improvements to the property are capitalized to the
extent that fair value is not exceeded.
The valuation of real estate owned, including development
projects, is reviewed for propriety by management at least
annually. Valuation allowances for estimated losses on real
estate are recorded when a decline in fair value is believed
to have occurred. The amount the Company could ultimately
recover from foreclosed real estate or loans foreclosed
in-substance could differ materially from the amount used in
arriving at the net carrying value of the assets because of
future market factors beyond the Company's control or
changes in the Company's strategy for recovering its
investment.
Real Estate Held for Development and Sale - Direct
construction and development costs are capitalized during
the construction and development period.
Sales of land (principally developed lots) are recorded
under the accrual method of accounting. Under this method,
a sale is not recognized until payments received aggregate a
specific required percentage of the contract sales price.
Until a contract qualifies as a sale, all collections are
recorded as deposits. Land and improvement costs are
allocated to individual lots and charged to cost of lots
sold based on the relative sales value method.
Property and Equipment - Property and equipment are recorded
at cost and are depreciated using the straight line method
(buildings over 30 to 40 years and furniture and equipment
over 3 to 10 years). Leasehold improvements are amortized
using the straight line method over the shorter of service
lives or related lease terms.
Interest Income - Interest on loans receivable is accrued
based on the unpaid principal balances. At the discretion
of management, an allowance is provided for the possible
loss of uncollected interest on loans which are more than 90
days past due. Such interest, if ultimately collected, is
credited to income when received.
Allowance for Losses - Provisions for losses include charges
to reduce the recorded balances of loans receivable, loans
foreclosed in-substance, and foreclosed real estate to their
estimated net realizable value or fair value, as applicable.
Provision for losses on letters of credit is charged when
the estimated obligation under the letter of credit exceeds
the estimated fair value of the underlying collateral. Such
provisions are based on management's estimate of net
realizable value or fair value of the collateral, as
applicable, considering the current and currently
-F-11-
anticipated future operating or sale conditions, thereby
causing these estimates to be particularly susceptible to
changes that could result in material adjustments to results
of operations. Recovery of the carrying value of such loans
and foreclosed real estate is dependent to a great extent on
economic, operating and other conditions that may be beyond
the Company's control.
Income Taxes - Effective October 1, 1991, the Company
elected to implement the provisions of Statement of
Financial Accounting Standards No. 109, "Accounting for
Income Taxes" (SFAS 109) which replaced Statement of
Financial Accounting Standards No. 96, "Accounting for
Income Taxes" (SFAS 96). Prior to October 1, 1991, the
Company accounted for income taxes in accordance with the
provisions of SFAS 96. The cumulative effect of the
adoption of SFAS 109 for years ending prior to October 1,
1991 was not significant. The effect of the adoption of
SFAS 109 for the year ended September 30, 1992 was to reduce
the net loss from operations approximately $680,000.
In accordance with SFAS 109 the Company recognizes a
deferred income tax liability or asset for the future tax
consequences of temporary differences between amounts
recorded for financial statement purposes and amounts
recorded for tax purposes.
Annapolis Bancorp, Inc. and its subsidiary file a
consolidated federal income tax return. Federal income tax
expense is allocated to the subsidiary as though it filed a
separate income tax return.
Deferred Loan Fees and Costs - Loan origination fees and
direct loan origination costs relating to successful loan
origination efforts are deferred and recognized over the
life of the loans as a yield adjustment.
New Accounting Pronouncements - In May, 1993, the Financial
Accounting Standards Board (FASB) issued SFAS No. 114,
"Accounting by Creditors for Impairment of a Loan," which
requires impaired loans to be measured based on the present
value of expected future cash flows discounted at the loan's
effective interest rate, or at the loan's observable market
price or the fair value of a collateral dependent loan, as a
practical expedient. The Statement is effective for fiscal
years beginning after December 15, 1994. It is not expected
to have a material impact on financial position or results
of operations upon adoption.
The FASB also issued SFAS No. 115," Accounting for Certain
Investments in Debt and Equity Securities," in May 1993.
SFAS No. 115 addresses the accounting and recording for
investments in equity securities that have readily
determinable fair values and for all debt securities. The
Statement is effective for fiscal years beginning after
December 15, 1993. Management believes that the adoption of
-F-12-
the Statement will not have a material adverse effect on the
financial position or results of operations of the Company.
Cash and Cash Equivalents - For purposes of reporting cash
flows, cash and cash equivalents include cash on hand,
amounts due from banks, and interest bearing deposits.
Reclassifications - For comparative purposes, certain
amounts in the prior periods have been reclassified to
conform to the presentation for 1993.
2. MUTUAL TO STOCK CONVERSION
Annapolis Bancorp, Inc. was incorporated August 6, 1986 to
purchase all the outstanding stock of AFSB upon its
conversion on December 31, 1986 from a mutual association
(Annapolis Federal Savings and Loan Association - the
Predecessor) to a stock corporation.
The Conversion was accounted for using the purchase method
of accounting. Accordingly, the aggregate net proceeds from
the stock issuance were allocated to the assets acquired and
the liabilities assumed, based on the fair value of such
assets and liabilities at the Conversion date.
Adjustments made to the various assets and liabilities
acquired to reflect each at fair value on the date of the
Conversion are being amortized over their respective
estimated remaining lives on a level yield basis, except for
the adjustment to property and equipment which is being
amortized on a straight-line basis. The unamortized
balances of the Conversion accounting adjustments at
September 30, 1993 and 1992, were $1,805,000 and $2,225,000,
respectively. The net effect of amortizing the Conversion
accounting adjustments was to decrease net income by
$420,000, $525,000, and $600,000 for the years ended
September 30, 1993, 1992, and 1991, respectively.
Assuming that the amortization of premiums, accretion of
discounts, and amortization of intangible assets were to
occur in the amounts projected as of September 30, 1993, the
estimated effect of purchase accounting adjustments on
income before income taxes for the years ending September
30, 1994, 1995, and 1996 would be a decrease of $170,000,
$130,000, and $65,000, respectively, as shown below. These
amounts could change significantly as a result of
dispositions of the Company's assets or liabilities that
give rise to the accretion or amortization.
As a condition of the Conversion, AFSB may not declare or
pay a cash dividend on the common stock in excess of 50% of
the lower of net operating income or net income. In
addition, AFSB may not pay a cash dividend if the effect
thereof would be to reduce the regulatory capital of AFSB
below federal requirements. AFSB is also subject to certain
other dividend restrictions. (See Note 17.)
-F-13-
Year Ended
September 30,
1994 1995 1996 Thereafter
(Amounts in thousands)
Amortization of premiums on loans
receivable $100 $ 45 ($18) $112
Amortization of premiums and
discounts on other assets
and liabilities 70 85 83 1,328
Net decrease in income before
income taxes and extraordinary
items $170 $130 $ 65 $1,440
3. DISCLOSURE OF FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair value of the Company's significant
financial instruments is provided below in accordance with
SFAS No. 107, "Disclosures about Fair Value of Financial
Instruments." Certain estimates and judgments were required
to develop to fair value amounts. The fair value amounts
shown below are not necessarily indicative of the amounts
that the Company would realize upon disposition nor do they
indicate the Company's intent or ability to dispose of the
financial instruments.
At September 30, 1993, the recorded book and estimated fair
values of financial instruments were:
Recorded Estimated
Book Value Fair Value
Financial assets:
Cash and cash equivalents $ 15,373,892 $ 15,373,892
Investment securities 24,744,657 25,059,300
Mortgage-backed and
related securities 40,720,621 41,897,000
Loans, net of allowance 215,974,935 215,838,000
Financial liabilities:
Deposits 288,076,984 287,786,000
Advances from Federal
Home Loan Bank 7,006,328 7,488,000
Bonds payable 9,622,230 9,622,230
Notes payable 7,302,041 7,302,041
Commitments 107,000
-F-14-
Cash and Cash Equivalents - The estimated fair value
approximates carrying value.
Investment, Mortgage-backed and Related Securities - Fair
values are based on quoted market prices or dealer quotes.
Loans - The estimated fair value is determined by
discounting contractual cash flows from the loans using
current lending rates for new loans with similar remaining
maturities and giving consideration to prepayments. the
resulting value is reduced by an estimate of losses inherent
in the portfolio.
Deposit Liabilities - The fair value of demand, savings, and
money market deposits with no defined maturity is the amount
payable on demand at the reporting date. The fair value of
fixed rate time deposits is estimated by discounting the
future cash flows to be paid, using the current rates at
which similar deposits with similar remaining maturities
would be issued.
Advances from Federal Home Loan Bank and Bonds Payable - The
fair value of Advances from Federal Home Loan Bank and bonds
payable are estimated by discounting the future cash flows
using the current rates at which similar debt could beissued.
Commitments - Commitments to make or sell loans, are not
recorded on the balance sheet. Their fair values are
estimated as the fees that would be charged customers to
enter into a similar agreement with comparable pricing and
maturity. For fixed rate commitments, the estimated fair
value also considered the difference between current levels
of internal rates and the committed rates.
4. SECURITIES
Investment securities consists of the following:
<TABLE>
1993
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
<S> <C> <C> <C> <C>
U.S. government and agency
obligations $22,464,357 $ 319,073 ($4,430) $22,779,000
Federal Home Loan
Bank stock 2,280,300 2,280,300
$24,744,657 $ 319,073 ($4,430) $25,059,300
-F-15-
1992
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
U.S. Government and
agency obligations $13,545,527 $ 591,392 ($50,919) $14,086,000
Federal Home Loan
Bank stock 2,280,300 2,280,300
$15,825,827 $ 591,392 ($50,919) $16,366,300
</TABLE>
Proceeds from sales of investment securities during the
years ended September 30, 1992 and 1991, were $4,307,625 and
$6,179,554, respectively, resulting in gross losses of
$60,788 in 1992 and gross gains of $23,749 in 1991. No
investment securities were sold in 1993.
Investment securities at September 30, 1993, by maturity:
Gross Estimated
Amortized Market
Cost Value
Due in one year or less $17,429,498 $17,482,000
Due after one year through
five years 5,034,859 5,297,000
Due after five years through ten years
Due after ten years 2,280,300 2,280,300
Total $24,744,657 z $25,059,300
AFSB is required to maintain an investment in stock of the
Federal Home Loan Bank (FHLB) in an amount equal to at least
1% of the unpaid principal balances of AFSB's residential
mortgage loans or 1/20 of its outstanding advances from the
FHLB, whichever is greater. Purchases and sales of stock
are made directly with the FHLB at par value.
5. MORTGAGE-BACKED AND RELATED SECURITIES
Mortgage-backed and related securities at September 30, 1993
and 1992, are summarized as follows:
-F-16-
<TABLE>
1993
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
<S> <C> <C> <C> <C>
GNMA pass-through
certificates $ 2,290,091 $ 131,606 $ 2,421,697
FNMA pass-through
certificates 19,172,167 745,597 19,917,764
FHLMC pass-through
certificates 11,253,906 242,933 11,496,839
Collateralized mortgage
obligations 8,004,457 56,243 8,060,700
Total $40,720,621 $1,176,379 $41,897,000
1992
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
<S> <C> <C> <C> <C>
GNMA pass-through
certificates $ 2,953,386 $ 142,478 $ 3,095,864
FNMA pass-through certificates 29,694,917 1,137,235 ($27,683) 30,804,469
FHLMC pass-through
certificates 9,508,073 646,048 (156,598) 9,997,523
Collateralized
mortgage obligations 1,030,683 28,009 (548) 1,058,144
Total $43,187,059 $1,953,770 ($184,829) $44,956,000
</TABLE>
Mortgage-backed securities totaling approximately
$10,064,000 were pledged at September 30, 1993, as
collateral for bonds. Taking into account the mortgage-
backed securities pledged unencumbered mortgage-backed
securities and related securities at September 30, 1993
amounted to approximately $30,657,000.
Mortgage-backed securities have a contractual life of five
years or greater; however, the actual life of these
securities is subject to change due to principal prepayments.
-F-17-
6. ACCRUED INTEREST RECEIVABLE
Accrued interest receivable at September 30, 1993 and 1992:
1993 1992
Investment securities $ 229,599 $ 274,701
Mortgage-backed securities 259,830 374,039
Loans receivable 2,172,567 2,742,976
$2,661,996 $3,391,716
7. LOANS RECEIVABLE, NET
Loans receivable at September 30, 1993 and 1992, are
summarized as follows:
1993 1992
Real estate mortgage loans $153,647,664 $156,192,572
Commercial 23,829,980 29,184,776
Installment 8,794,540 10,035,116
Real estate construction and
land 28,501,455 41,545,000
Lines of credit 8,132,530 9,724,959
Other 1,464,224 4,255,865
Total 224,370,393 250,938,288
Less:
Undisbursed portion of loans
in process (4,239,000) (8,140,239)
Allowance for loan losses (2,900,825) (3,200,174)
Deferred loan fees (1,255,633) (1,172,779)
Loans receivable, net $215,974,935 $238,425,096
Included in real estate mortgage loans receivable at
September 30, 1993 and 1992, are loans held for sale
amounting to $888,000 and $2,557,000, respectively.
The Company originates and purchases both adjustable and
fixed interest rate loans. At September 30, 1993, the
composition of these loans was as follows:
-F-18-
Fixed Rate Adjustable Rate
Term to Rate
Term to Maturity Book Value Adjustment Book Value
1 mo. - 1 yr.$ 4,233,991 1 mo. - 1 yr. $109,394,643
1 yr. - 3 yr. 3,751,000 1 yr. - 3 yr. 51,414,132
3 yr. - 5 yr. 4,170,459 3 yr. - 5 yr. 5,854,947
5 yr. - 10 yr. 5,282,814 5 yr. - 10 yr. 3,555,904
10 yr. - 20 yr.27,511,393 10 yr. - 20 yr. 1,300,102
Over 20 years 7,321,000 Over 20 years 580,008
$52,270,657 $172,099,736
Residential adjustable rate loans have interest rate
adjustment limitations, while others have no limitations.
Adjustable rate loans are indexed to various current market
indices.
Nonaccrual loans totaled $4,620,000 and $8,526,000 at
September 30, 1993 and 1992, respectively. Interest income
not recognized on these loans totaled approximately
$286,000, $580,000 and $154,000 for the years ended
September 30, 1993, 1992 and 1991, respectively.
The following is a summary of the changes in the allowance
for loan losses:
1993 1992 1991
Balance, beginning of
period $3,200,174 $1,205,142 $1,742,340
Provision for estimated
losses 155,618 5,931,293 230,000
Items charged off net of recoveries
of recoveries (454,967) (3,936,261) (767,198)
Balance, end of peod $2,900,825 $3,200,174 $1,205,142
Construction and Commercial Lending Activities - The Company
originates commercial real estate loans. These loans are
considered by management to be of somewhat greater risk of
uncollectibility due to the dependency on income production
or future development of the real estate. Of the
construction and commercial real estate loans, approximately
$2,339,000 collateralized by multi- family residential
property, and $74,112,000 by office and retail developments
and land. Arrangements for certain loans require the
Company to provide, from the loan proceeds, amounts
sufficient for payment of loan fees and anticipated costs
during acquisition, development or construction, including
interest. This type of lending is considered by management
to have higher than normal risks because the borrower may
have little or no equity investment in the acquisition,
development or construction project. At September 30, 1993,
such loans totaled $2,178,000, which amounted to 1% of the
-F-19-
Company's loan portfolio.
Under current regulations, a Federally-chartered savings and
loan association's aggregate commercial real estate loans
may not exceed 400% of its capital as determined under the
regulatory capital standards. The regulations do not
require divestiture of any loan that was lawful when it was
originated. Management does not anticipate that this
regulation will adversely impact lending policies.
Mortgage Banking Activities - The Company originates
mortgage loans for portfolio investment or sale in the
secondary market. Sales are generally limited to new fixed
rate mortgages, substantially all of which are sold shortlyafter
origination. These loans are carried at lower of cost
or market.
At September 30, 1993 and 1992, the Company was servicing
loans for others amounting to approximately $52,755,000 and
$78,793,000, respectively. Servicing loans for others
generally consists of collecting mortgage payments,
maintaining escrow accounts, disbursing payments to
investors and foreclosure processing. Loan servicing income
is recorded on the accrual basis and includes servicing fees
from investors and certain charges collected from borrowers,
such as late payment fees. In connection with these loans
serviced for others, the Company held borrowers' escrow
balances of approximately $205,000 and $639,000 at September
30, 1993 and 1992, respectively.
8. INVESTMENTS IN AND LOANS TO JOINT VENTURES AND REAL ESTATE
HELD FOR DEVELOPMENT AND SALE
The Company, through Maryland Service Development
Corporation, has entered into various joint venture
agreements with developers principally for the acquisition,
development, and construction of property for both
commercial and residential use. Such investments are
accounted for using the equity method of accounting.
In some cases, the Company also makes loans to the joint
ventures. Often the loan arrangements require the Company
to provide, from the loan proceeds, amounts sufficient for
payment of loan fees and anticipated costs during
acquisition, development or construction, including
interest. This type of lending is considered by management
to have higher than normal risks because the borrower may
have little or no equity investment in the acquisition,
development or construction project, and the ability of the
Company to recover investments and loans is dependent on
future income production or future development and sale of
the real estate.
At September 30, 1993, the Company had investments in four
joint ventures in which it shares equally in the profits and
losses. All of these investments and loans, approximately
-F-20-
$894,000, relate to single and multi-family residential
property.
The Company's investment at September 30, 1993 and
1992, consisted of the following:
1993 1992
Capital contributions $ 247,687 $ 664,439
Construction and land acquisition loans 646,714 1,427,380
Total investments in and loans to joint
ventures $ 894,401 $2,091,819
Combined financial information of the joint ventures as of
September 30, 1993 and 1992, and for the years then ended is
summarized as follows:
1993 1992
Assets
Cash $ 57,613 $ 5,678
Land 697,694 1,337,585
Capitalized construction costs 910,441 1,413,941
Other assets 94,621 24,120
$1,760,369 $2,781,324
1993 1992
Liabilities and Partners' Equity
Liabilities:
Accounts payable and other
liabilities $ 526,370 $ 349,204
Loans payable to AFSB 646,714 1,427,380
Loans payable to others 166,466
Total Liabilities 1,339,550 1,776,584
Partners' Equity:
Maryland Service Development
Corporation 247,687 664,439
Other partners 173,132 340,301
Total Partners' Equity 420,819 1,004,740
Total Liabilities and Partners'
Equity $ 1,760,369 $ 2,781,324
Total Net Loss $ (240,256) $ (55,943)
Net income for the year ended September 30, 1991, was
$9,383.
At September 30, 1992, the Company had real estate held for
-F-21-
development and sale with a carrying value of approximately
$1,367,000. Such real estate consisted primarily of a
medical office condominium complex which was sold during
1993, resulting in a loss of approximately $110,000 which is
included in the net loss from real estate operations in the
Consolidated Statements of Operations.
The ability of the Company to recover the carrying value of
real estate held for development and sale (including
capitalized interest) is based upon future sales of the land
and the projects. The ability to effect such sales is
subject to market conditions and other factors, all of which
are beyond the Company's control.
9. PROPERTY AND EQUIPMENT
Property and equipment at September 30, 1993 and 1992:
1993 1992
Land $ 1,709,342 $ 1,709,342
Office buildings 7,858,239 7,510,102
Leasehold improvements 647,273 893,912
Furniture and equipment 3,148,689 3,251,503
Total 13,363,543 13,364,859
Less accumulated depreciation
and amortization (2,422,888) (2,246,497)
Property and equipment, net $10,940,655 $11,118,362
-F-22-
10. DEPOSITS
Deposits at September 30, 1993 and 1992:
1993 1992
Percent Percent
Weighted to Weighted to
Amount Rate Total Amount Rate Total
Passbook
and statement
accounts $ 92,650,454 3.24% 32.2% $ 80,127,576 3.91% 25.7%
NOW accounts 33,933,356 2.06 11.8 33,203,536 2.34 10.9
Insured money
market accounts 16,844,000 2.90 5.8 18,806,496 3.30 6.0
Total 143,427,810 49.8 132,137,608 42.6
Term
certificate
accounts 130,641,174 4.97 45.3 153,608,987 5.99 49.4
$100,000 and
over negotiated
rate certificates 14,008,000 3.42 4.9 24,964,000 4.47 8.0
Total 144,649,174 50.2 178,572,987 57.4
Total deposits $288,076,984 3.87 100.0% $310,710,595 4.78 100.0%
At September 30, 1993, the scheduled maturities of
certificate accounts are as follows:
Year Ending September 30:
1994 $100,262,174
1995 24,936,000
1996 thru 1998 19,444,000
Thereafter 7,000
Total $144,649,174
-F-23-
Interest on deposits was as follows:
1993 1992 1991
Passbook, statement, and
certificate accounts $11,160,162 $15,945,232 $20,633,369
NOW accounts and money
market investment accounts 1,248,826 1,768,590 2,249,325
Penalty income (34,012) (46,194) (58,792)
Total $12,374,976 $17,667,628 $22,823,902
11. ADVANCES FROM FEDERAL HOME LOAN BANK
Advances from the FHLB of Atlanta are collateralized by the
Company's stock in the FHLB and by mortgage loans with a
book value of approximately $14,707,000 at September 30,
1993. The rates and maturities of the advances outstanding
at September 30, 1993 and 1992 are as follows:
Year Ending Interest Rate 1993 1992
September 30:
1993 8.30% $1,000,926
1994 9.60 $3,000,000 3,000,000
1995 8.35 2,002,431 2,004,226
1996 8.35 2,003,897 2,005,692
Total $7,006,328 $8,010,844
12. BONDS PAYABLE
Bonds payable consist of Series A Mortgage Collateralized
Bonds, which are limited recourse obligations of AFSB's
limited purpose finance subsidiary, AFFC I, and are secured
by a pledge of, and security interest in, certain
mortgage-backed securities. The bonds are not obligations
of, and are not guaranteed by, AFSB or the Company. The
bonds are not obligations or deposits insured by the Savings
Association Insurance Fund (SAIF). The bonds bear interest
at 9.50% and mature on various dates between 2013 and 2019.
13.AMOUNTS DUE FIRST LIENHOLDERS
Amounts due first lienholders represent FHA and VA loans
assumed in connection with loans made by the Company to the
buyers of residential property. New loans made by the
Company are written for a term equal to the mortgage
assumed. The first lienholders were paid in full as of
September 30, 1993.
-F-24-
14. INCOME TAXES
The following reconciliation summarizes the effects ofpermanent and
temporary differences between income taxes as
computed by statutory tax rates and as reported for
financial accounting purposes.
1993 1992 1991
Income (loss) before income
taxes $1,354,790 $(4,961,769) $1,093,526
Income tax at statutory rates $ 461,000 $(1,687,000) $ 372,000
Bad debt deduction net
of applicable preference
tax (93,000) (1,369,000) (67,000)
State income tax, net of
federal benefit 141,000 (149,000) 175,000
Amortization of conversion
accounting adjustments 152,000 180,000 202,000
Maturity of bonds (loss on sale) 85,000 74,000 42,000
Additional fee income
recognized, net of direct
costs 170,000 (195,000) (24,000)
Provision for loan losses 53,000 2,017,000 (183,000)
Deferral of income from joint
ventures 58,000 97,000
Gain on sale of real estate
acquired through foreclosure (148,000) (46,000) (48,000)
Other, net (217,000) (58,000) 129,000
Current income tax provision 662,000 (1,233,000) 695,000
Deferred income tax
provision (benefit) (264,000) (861,000) (160,000)
Total income taxes (benefit) $ 398,000 $(2,094,000) $ 535,000
The tax effect of temporary differences that give use to
deferred tax assets and deferred tax liabilities at
September 30, 1993 and 1992, are presented below:
1993 1992
Deferred tax liabilities:
Conversion accounting adjustments $1,107,000 $1,264,000
Depreciation 128,000 81,000
Loss on sale of bonds 169,000 257,000
Other 12,000 25,000
Gross deferred tax liabilities 1,416,000 1,627,000
Deferred tax assets:
Allowance for loan losses 1,015,000 1,120,000
Loan fees 424,000
250,000
Other 277,000 88,156
Gross deferred tax assets 1,716,000 1,458,156
Valuation allowance for deferred
tax assets
Net deferred tax assets 1,716,000 1,458,156
Net deferred tax assets (liability) $ 300,000 $ (168,844)
-F-25-
AFSB is permitted under the Internal Revenue Code to deduct
an annual addition to a reserve for bad debts in determining
taxable income, subject to certain limitations. This
addition differs from the bad debt experience used for
financial accounting purposes. Bad debt deductions for
income tax purposes are included in taxable income of later
years if the bad debt reserves are used subsequently for
purposes other than to absorb bad debt losses. Because AFSB
does not intend to use the reserve for purposes other than
to absorb losses, no deferred income taxes have been
provided. Retained earnings at September 30, 1993 includes
approximately $3,100,000 representing such bad debt
deductions for which no deferred income taxes have been
provided. The amount of unrecognized deferred tax liability
on such bad debt deductions at September 30, 1993, was
approximately $1,085,000.
15. PENSION PLANS
401(K) Plan - The Company maintains a 401(K) plan for its
employees. The Plan covers substantially all employees, who
may elect to contribute between 1% and 15% of their salary.
The Company matches 50% of employee contributions up to 5%.
Additional contributions are made annually at the Board of
Directors' discretion. Employer contribution expense was
$100,000 for each of the three years in the period ended
September 30, 1993.
Supplemental Plan - The Company maintains a supplemental
retirement plan for one retired executive. The Company's
paid $23,602 for each of the three years in the period ended
September 30, 1993, pursuant to this plan.
16. LEASE ARRANGEMENTS
The Company's lease arrangements consist primarily of leases
of real property for eight of its branch locations. In
addition to rent, the Company is generally obligated to pay
property taxes, insurance and other operating expenses. Six
of the leases include renewal options with rental
adjustments based on increases in the consumer price index
and certain other factors. Future minimum lease payments at
-F-26-
September 30, 1993 under non-cancelable operating leases and
future minimum sublease income are as follows:
Year Ending Minimum Lease Lease
September 30, Payments Income
1994 $ 763,912 $ 86,005
1995 317,410 82,149
1996 268,459 84,615
1997 250,773 87,153
1998 256,438 21,948
Thereafter 1,865,406
Total minimum
lease payments $3,722,398 $ 361,870
17. STOCKHOLDERS' EQUITY AND REGULATORY CAPITAL
Sale of Common Stock - In April, 1991, the Company completed
a private placement offering resulting in the sale of
205,500 shares of common stock with net proceeds of
$2,020,000. Subsequent to completion of the sale, the
Company made an additional investment of $1,000,000 in AFSB.
Regulatory Capital - Under current capital regulations, AFSB
must have: (i) core capital equal to 3 percent of adjusted
total assets, (ii) tangible capital equal to 1.5 percent of
adjusted total assets, and (iii) total capital equal to 8.0
percent of risk-weighted assets.
In measuring its compliance with capital regulations, AFSB
must deduct from capital its investments in, and advances
to, subsidiaries engaged in activities not permissible for
national banks (i.e., joint ventures). There is a five-year phase-in
of this provision for investments held as of
April 12, 1989. At September 30, 1993, this phase-in
requirement requires a 60% deduction, which increases
through additional phases to 100% at June 30, 1994.
At September 30, 1993, AFSB's regulatory equity capital was
as follows (dollars in thousands):
Tangible Core Risk-based
Capital Capital Capital
AFSB's total stockholder's
equity $17,643 $17,643 $17,643
Investments and advances to
"non-includable"
subsidiaries (463) (463) (463)
General valuation allowances 2,568
Regulatory capital computed 17,180 17,180 19,748
Minimum capital requirement (4,848) (9,696) (16,407)
Regulatory capital excess $12,332 $7,484 $ 3,341
Computed capital ratio 5.3% 5.3% 9.6%
Minimum capital ratio 1.5 3.0 8.0
Regulatory capital excess 3.8% 2.3% 1.6%
-F-27-
Certain other regulatory capital amendments are mandated or
expected to occur in future periods. These amendments may
include, among other things, possible increases in required
core capital levels to between 4% and 5%. Based upon the
current proposed capital requirements, management does not
believe that the proposed regulations will have a material
adverse impact on AFSB. However, events beyond the control
of AFSB, such as a downturn in the economy in areas where
AFSB originates most of its loans, could adversely affect
future earnings and, consequently, the ability of AFSB to
meet its future minimum capital requirements.
At periodic intervals, both the Office of Thrift Supervision
(OTS) and Federal Deposit Insurance Corporation (FDIC)
routinely examine AFSB's financial statements as part of
their legally prescribed oversight of the savings and loan
industry. Based on these examinations, the regulators can
direct that AFSB's consolidated financial statements be
adjusted in accordance with their findings.
In March 1992 the OTS and AFSB entered into a supervisory
agreement which required AFSB to: 1) strengthen its loan
underwriting policies and procedures; 2) improve appraisal
review policies and procedures; 3) improve its asset
classification procedures including procedures related to
foreclosed properties; 4) discontinue the payment of
dividends until classified assets are reduced to a level
less than AFSB's risk-based capital and 5) strengthen its
policies related to evaluation of non-accrual loans. The
supervisory agreement was terminated by the OTS based on the
results of its June 1993 examination of AFSB. However, to
ensure continuing compliance with applicable laws and
regulations, and financial safety and soundness standards,
AFSB has committed, by a resolution of the Board of
Directors to continue to monitor its policies and procedures
consistent with the intent of the former supervisory
agreement.
As a result of the Conversion, AFSB is subject to certain
dividend restrictions as discussed in Note 2. AFSB is also
subject to regulatory dividend restrictions under which
dividends are limited to 50% of net income over the most
recent four quarters. AFSB must comply with the more
stringent of the requirements.
Stock Option Plan - The Company maintains a stock option
-F-28-
plan under which stock options may be granted to employees.
During the year ended September 30, 1991, options were
exercised for the purchase of 5,000 shares at $3.00 per
share. At September 30, 1993, options for 5,000 shares at
$3.00 per share remained outstanding and options may be
granted for an additional 90,000 shares.
18. COMMITMENTS AND CONTINGENT LIABILITIES
The Company had approximately $2,299,000 in outstanding loan
commitments and approximately $14,054,000 in unused lines of
credit at September 30, 1993, all of which will expire
within one year. The Company also had commitments to sell
loans of $5,922,000. The Company uses the same creditpolicies in making
commitments and conditional obligations
as it does for originating loans.
19. NOTE PAYABLE
The note payable balance consists of a note secured by the
stock of AFSB and the Business Fund Reserve Account
discussed below. This note is a result of a September 1993
modification of a prior outstanding loan.
The terms of the note are as follows: original loan amount
of $7,320,130, principal and interest payments due
quarterly, interest rate fixed at 7.77%, due May 28, 1999.
Under terms of the loan agreement, the Company maintains a
Business Fund Reserve Account and is prohibited from paying
dividends on the common stock until the principal balance of
the loan is reduced below $3,000,000. The note requires a
principal curtailment of between $2,000,000 and $3,000,000,
dependent upon certain conditions contained in the loan
agreement, no later than June 1994.
Additionally, the Company is obligated to pay a loan fee
between $250,000 and $1,000,000 depending on the amount of
the curtailment made no later than June 1994 (see above). As
of September 30, 1993, $555,000 representing the present
value of the loan fee payable has been accrued.
In conjunction with the letter of intent described in Note
21, the Company has received a commitment from Crestar
Financial Corporation to refinance the note payable
conditional on the Company's approval of the sale of the
Company to Crestar Financial Corporation. Under the terms
of the commitment the loan will bear interest at 7.77% and
principal and interest payments are payable quarterly in the
amount of $185,000. The refinancing will require a $2
million curtailment in August 1997.
20. PARENT COMPANY FINANCIAL INFORMATION
The following information on Annapolis Bancorp, Inc. (parent
company only) should be read in conjunction with the other
-F-29-
notes to consolidated financial statements.
STATEMENTS OF FINANCIAL CONDITION
Assets 1993 1992
Investment in AFSB $17,643,851 $16,347,153
Cash and interest-bearing
deposits 385,563 703,632
Prepaid expenses and other assets 41,258 153,097
Income tax receivable 820,000 1,350,000
Deferred taxes 85,000
Total assets $18,890,672 $18,638,882
Liabilities
Notes payable $ 7,302,041 $ 7,302,041
Intercompany payable 525,000 1,305,000
Other liabilities 555,000 480,000
Total liabilities 8,382,041 9,087,041
Stockholders' Equity
Common stock 1,205,500 1,205,500
Additional paid-in capital 3,314,500 3,314,500
Retained earnings - substantially
restricted 5,988,631 5,031,841
Total stockholders' equity 10,508,631 9,551,841
Total liabilities and
stockholders' equity $18,890,672 $18,638,882
STATEMENTS OF OPERATIONS
1993 1992 1991
Income and expenses:
Dividends received from AFSB -- -- $ 557,000
Interest income $ 16,296 $ 28,978 17,588
Interest expense (518,242) (974,446) (786,974)
Other expenses (141,962) (52,317) (49,357)
Loss before income tax and
equity in undistributed income
of AFSB (loss) of AFSB (643,908) (997,785) (261,743)
Income tax benefit 304,000 374,708 227,000
Loss before equity in
undistributed
income (loss) of AFSB (339,908) (623,077) (34,743)
Equity in undistributed
income (loss)
of AFSB 1,296,698 (2,244,692) 593,269
Net income (loss) $ 956,790 $(2,867,769) $ 558,526
-F-30-
During the years ended September 30, 1993, 1992, and 1991,
the Company received dividends from AFSB of $-0-, $-0- and
$557,000, respectively, and paid interest of approximately$518,000,
$974,000, and $787,000, respectively.
21. PENDING SALE OF COMPANY
On November 16, 1993, the Company and Crestar Financial
Corporation (Crestar) executed a letter of intent under
which Crestar will acquire the Company. The Company
shareholders will received $12.75 in Crestar common stock
for each share of the Company stock owned.
The letter of intent is subject to the execution of adefinitive agreement,
regulatory approvals and the approval
of the Company's shareholders. As a condition of the letter
of intent, the Company has granted Crestar an option to
purchase from the Company an amount of shares equal to
approximately 20 per cent of the Company's outstanding
shares subject to certain conditions contained in the option
agreement. The accompanying financial statements do not
include any adjustments relating to the impending sale of
the Company.
Annex I
AGREEMENT AND PLAN OF REORGANIZATION
among
CRESTAR FINANCIAL CORPORATION,
CRESTAR BANK MD,
ANNAPOLIS BANCORP, INC.
AND
ANNAPOLIS FEDERAL SAVINGS BANK
December 22, 1993
INDEX
Page
ARTICLE I
General
1.1. Holding Company Merger . . . . . . . . . . . . . . 2
1.2. Bank Merger . . . . . . . . . . . . . . . . . . . . 2
1.3. Issuance of Crestar Common Stock and Cash . . . . . 3
1.4. Taking of Necessary Action . . . . . . . . . . . . 3
ARTICLE II
Effect of Transaction on Common Stock, Assets, Liabilities
and Capitalization of Crestar, Crestar Bank MD, AB and
Annapolis
2.1. Conversion of Stock; Exchange Ratio; Cash
Election . . . . . . . . . . . . . . . . . . . . . 3
2.2. Manner of Exchange . . . . . . . . . . . . . . . . 4
2.3. No Fractional Shares . . . . . . . . . . . . . . . 6
2.4. Dissenting Shares . . . . . . . . . . . . . . . . . 6
2.5. Assets . . . . . . . . . . . . . . . . . . . . . . 6
2.6. Liabilities . . . . . . . . . . . . . . . . . . . . 7
ARTICLE III
Representations and Warranties
3.1. Representations and Warranties of AB and Annapolis 7
(a) Organization, Standing and Power . . . . . . . 7
(b) Capital Structure . . . . . . . . . . . . . . 8
(c) Authority . . . . . . . . . . . . . . . . . . 8
(d) Investments . . . . . . . . . . . . . . . . . 10
(e) Financial Statements . . . . . . . . . . . . . 10
(f) Absence of Undisclosed Liabilities . . . . . . 11
(g) Tax Matters . . . . . . . . . . . . . . . . . 11
(h) Options, Warrants and Related Matters. . . . . 12
(i) Property . . . . . . . . . . . . . . . . . . . 13
(j) Additional Schedules Furnished to Crestar . . 13
(k) Agreements in Force and Effect . . . . . . . . 14
(l) Legal Proceedings; Compliance with Laws . . . 14
(m) Employee Benefit Plans . . . . . . . . . . . . 15
(n) Insurance . . . . . . . . . . . . . . . . . . 17
(o) Loan Portfolio . . . . . . . . . . . . . . . . 18
(p) Absence of Changes . . . . . . . . . . . . . . 19
(q) Brokers and Finders . . . . . . . . . . . . . 19
(r) Subsidiaries . . . . . . . . . . . . . . . . . 19
(s) Reports. . . . . . . . . . . . . . . . . . . . 20
(t) Environmental Matters . . . . . . . . . . . . 20
(u) Delaware General Corporation Law, Etc . . . . 22
(v) Disclosure . . . . . . . . . . . . . . . . . . 22
(w) Conversion; Liquidation Account . . . . . . . 22
3.2. Representations and Warranties of Crestar and
Crestar Bank MD . . . . . . . . . . . . . . . . . . 22
(a) Organization, Standing and Power . . . . . . . 22
(b) Capital Structure . . . . . . . . . . . . . . 23
(c) Authority . . . . . . . . . . . . . . . . . . 23
(d) Financial Statements . . . . . . . . . . . . . 24
(i)
(e) Absence of Undisclosed Liabilities . . . . . . 25
(f) Absence of Changes . . . . . . . . . . . . . . 25
(g) Brokers and Finders . . . . . . . . . . . . . 25
(h) Subsidiaries; Ownership of AB Common Stock. . . 26
(i) Tax Matters . . . . . . . . . . . . . . . . . 26
(j) Property . . . . . . . . . . . . . . . . . . . 26
(k) Agreements in Force and Effect . . . . . . . . 27
(l) Legal Proceedings; Compliance with Laws . . . 27
(m) Employee Benefit Plans . . . . . . . . . . . . 28
(n) Loan Portfolio . . . . . . . . . . . . . . . . 29
(o) Disclosure . . . . . . . . . . . . . . . . . . 29
ARTICLE IV
Conduct and Transactions Prior to
Effective Time of the Merger
4.1. Access to Records and Properties of Crestar,
Crestar Bank MD, AB and Annapolis, Confidentiality 30
4.2. Registration Statement, Proxy Statement,
Shareholder Approval . . . . . . . . . . . . . . . 30
4.3. Operation of the Business of AB and Annapolis . . . 31
4.4. No Solicitation . . . . . . . . . . . . . . . . . . 32
4.5. Dividends . . . . . . . . . . . . . . . . . . . . . 33
4.6. Regulatory Filings; Best Efforts . . . . . . . . . 33
4.7. Public Announcements . . . . . . . . . . . . . . . 33
4.8. Operating Synergies; Conformance to Reserve
Policies, Etc. . . . . . . . . . . . . . . . . . . 33
4.9. Transactions in Crestar Common Stock . . . . . . . 34
4.10. Crestar Rights Agreement . . . . . . . . . . . 34
4.11. NYSE Listing . . . . . . . . . . . . . . . . . 34
4.12. Agreement as to Efforts to Consummate . . . . 34
4.13. Adverse Changes in Condition . . . . . . . . . 35
4.14. Updating of Schedules . . . . . . . . . . . . 35
ARTICLE V
Conditions of Transaction
5.1. Conditions of Obligations of Crestar and Crestar
Bank MD . . . . . . . . . . . . . . . . . . . . . . 35
(a) Representations and Warranties; Performance
of Obligations; No Adverse Change . . . . . . 35
(b) Authorization of Transaction . . . . . . . . . 36
(c) Opinion of Counsel . . . . . . . . . . . . . . 36
(d) The Registration Statement . . . . . . . . . . 36
(e) Tax Opinion . . . . . . . . . . . . . . . . . 36
(f) Regulatory Approvals . . . . . . . . . . . . . 37
(g) Affiliate Letters . . . . . . . . . . . . . . 37
(h) Acceptance by Crestar and Crestar Bank MD
Counsel . . . . . . . . . . . . . . . . . . . 37
(i) Consent of First National Bank of Maryland or
Payment in Full of FNBM Loan . . . . . . . . . 37
5.2. Conditions of Obligations of AB and Annapolis . . . 37
(a) Representations and Warranties; Performance
of Obligations . . . . . . . . . . . . . . . . 38
(b) Authorization of Transaction . . . . . . . . . 38
(c) Opinion of Counsel . . . . . . . . . . . . . . 38
(d) The Registration Statement . . . . . . . . . . 40
(e) Regulatory Approvals . . . . . . . . . . . . . 40
(ii)
(f) Tax Opinion . . . . . . . . . . . . . . . . . 40
(g) Fairness Opinion . . . . . . . . . . . . . . . 41
(h) NYSE Listing . . . . . . . . . . . . . . . . . 42
(i) Acceptance by AB and Annapolis Counsel. . . . 42
(j) Consent of First National Bank of Maryland or
Payment in Full of FNBM Loan . . . . . . . . . 42
ARTICLE VI
Closing Date; Effective Time
6.1. Closing Date . . . . . . . . . . . . . . . . . . . 42
6.2. Filings at Closing . . . . . . . . . . . . . . . . 42
6.3. Effective Time . . . . . . . . . . . . . . . . . . 42
ARTICLE VII
Termination; Survival of Representations,
Warranties and Covenants; Waiver and Amendment
7.1. Termination . . . . . . . . . . . . . . . . . . . . 43
7.2. Effect of Termination . . . . . . . . . . . . . . . 44
7.3. Survival of Representations, Warranties and
Covenants . . . . . . . . . . . . . . . . . . . . . 44
7.4. Waiver and Amendment . . . . . . . . . . . . . . . 44
ARTICLE VIII
Additional Covenants
8.1. Payment of the Note . . . . . . . . . . . . . . . . 45
8.2. Indemnification and AB Officers and Directors
Liabilities Insurance . . . . . . . . . . . . . . . 45
8.3. Employee Matters . . . . . . . . . . . . . . . . . 46
8.4. Employee Benefit Matters . . . . . . . . . . . . . 46
8.5. Stock Options . . . . . . . . . . . . . . . . . . . 48
8.6. Crestar Bank MD/Annapolis Local Advisory Board of
Directors . . . . . . . . . . . . . . . . . . . . . 48
ARTICLE IX
Miscellaneous
9.1. Expenses . . . . . . . . . . . . . . . . . . . . . 48
9.2. Entire Agreement . . . . . . . . . . . . . . . . . 48
9.3. Descriptive Headings . . . . . . . . . . . . . . . 48
9.4. Notices . . . . . . . . . . . . . . . . . . . . . . 48
9.5. Counterparts . . . . . . . . . . . . . . . . . . . 49
9.6. Governing Law . . . . . . . . . . . . . . . . . . . 49
Exhibit A - Plan of Merger of AB into Crestar
(iii)
AGREEMENT AND PLAN OF REORGANIZATION
This Agreement and Plan of Reorganization (the
"Agreement") dated as of December 22, 1993 among Crestar
Financial Corporation, a Virginia corporation ("Crestar"),
Crestar Bank MD, a Maryland banking corporation wholly-owned by
Crestar ("Crestar Bank MD"), Annapolis Bancorp, Inc., a Delaware
corporation ("AB"), and Annapolis Federal Savings Bank, a
federally chartered stock savings bank wholly-owned by AB
("Annapolis").
A. AB and Crestar have entered into a Letter of Intent
and a Stock Option Agreement (the "Option Agreement") both dated
November 16, 1993, pursuant to which AB has agreed to be acquired
by Crestar and AB has granted an option to Crestar to purchase
shares of AB Common Stock in certain events. The Option
Agreement shall survive the execution of this Agreement for the
term provided in the Option Agreement.
B. The boards of directors of Crestar and AB deem it
advisable to merge AB into Crestar (the "Holding Company Merger")
pursuant to this Agreement and the Plan of Merger attached as
Exhibit A (the "Holding Company Plan of Merger") whereby the
holders of shares of common stock of AB ("AB Common Stock")
will receive common stock of Crestar ("Crestar Common Stock") or cash
in exchange therefor.
C. The boards of directors of Crestar, AB, Crestar Bank
MD and Annapolis deem it advisable that after the Holding Company
Merger, Crestar shall cause Annapolis directly or indirectly to
be merged into Crestar Bank MD (the "Bank Merger"). Unless the
Maryland banking statutes, which currently prohibit a savings and
loan association from merging into a Maryland bank, are amended
prior to the Closing Date the boards of directors deem it
advisable that the Bank Merger be accomplished indirectly through
the formation of an Interim Thrift, the merger of Annapolis into
the Interim Thrift (the "Thrift Merger") pursuant to this
Agreement and the Thrift Agreement of Merger attached as Exhibit
B (the "Thrift Plan of Merger"), the subsequent conversion of the
Interim Thrift into the Interim Bank (the "Conversion") pursuant
to this Agreement and the Plan of Conversion attached as Exhibit
C, and the merger of the Interim Bank into Crestar Bank MD (also
referred to as the "Bank Merger") pursuant to this Agreement and
the Bank Agreement of Merger attached as Exhibit D-1 (the "Bank
Plan of Merger"). If prior to the Closing Date the Maryland
banking statutes are amended to authorize the direct merger of a
savings and loan association into a Maryland bank, Annapolis may
merge directly into Crestar Bank MD in accordance with this
Agreement and the Bank Agreement of Merger attached as Exhibit D-
2 (also referred to as the "Bank Plan of Merger"). The Thrift
Plan of Merger and the Bank Plans of Merger are collectively
referred to herein as the "Bank Plan of Merger", and together
with the Plan of Conversion, the "Plans". The Holding Company
Merger, the Thrift Merger, the Conversion and the Bank Merger are
referred to herein collectively as the "Transaction."
I-1
D. To effectuate the foregoing, the parties desire to
adopt a plan of reorganization in accordance with the provisions
of Section 368(a) of the United States Internal Revenue Code,
as amended (the "Code").
NOW, THEREFORE, in consideration of the mutual benefits
to be derived from this Agreement, and of the representations,
warranties, conditions and promises herein contained, Crestar,
Crestar Bank MD, AB and Annapolis hereby adopt this Agreement
whereby at the "Effective Time of the Merger" (as defined in
Article VI hereof) AB shall be merged into Crestar in accordance
with the Holding Company Plan of Merger and at the "Effective
Time of the Bank Merger" (as defined in Article VI hereof)
Annapolis shall be merged directly or indirectly into Crestar Bank
MD in accordance with the Bank Plan of Merger. The
outstanding shares of AB Common Stock shall be converted into
shares of Crestar Common Stock or cash as provided in this
Agreement on the basis, terms and conditions contained herein and
in the Holding Company Plan of Merger. The outstanding shares of
Annapolis Common Stock shall be canceled. In connection
therewith, the parties hereto agree as follows:
ARTICLE I
General
1.1. Holding Company Merger. Subject to the
provisions of this Agreement and the Holding Company Plan of
Merger, at the Effective Time of the Holding Company Merger the
separate existence of AB shall cease and AB shall be merged with
and into Crestar (the "Surviving Company").
1.2. Bank Merger. (a) Subject to the provisions of
this Agreement and the Bank Plan of Merger, immediately
following the Effective Time of the Holding Company
Merger, Crestar shall cause Annapolis to merge directly
or indirectly with and into Crestar Bank MD (the
"Surviving Bank"), which merger shall qualify as an
"Oakar" transaction in accordance with Section 5(d)(3)(A)
of the Federal Deposit Insurance Act and the separate
existence of Annapolis shall cease. If the Maryland
banking statutes are amended prior to the Closing Date to
authorize the direct merger of Annapolis into Crestar
Bank MD, Crestar may elect to merge Annapolis directly
into Crestar Bank MD.
(b) If the Maryland banking statutes are not amended
prior to the Closing Date, the Bank Merger shall be
accomplished indirectly through the formation of a
Maryland-chartered savings and loan association, which
will be a wholly owned subsidiary of Crestar (the
"Interim Thrift"). Annapolis shall merge with and into
the Interim Thrift and the Interim Thrift shall then
convert into a Maryland-chartered commercial bank (the
"Interim Bank"). Immediately after the Conversion, the
Interim Bank will merge with and into Crestar Bank MD, as
the Surviving Bank.
I-2
1.3. Issuance of Crestar Common Stock and Cash.
Crestar agrees that at the Effective Time of the Holding Company
Merger it will issue Crestar Common Stock or pay cash to
the extent set forth in, and in accordance with, the terms of this
Agreement and the Holding Company Plan of Merger.
1.4. Taking of Necessary Action. In case at any time
after the Effective Time of the Merger any further action is
necessary or desirable to carry out the purposes of this
Agreement and to vest the Surviving Company and/or Surviving Bank
with full title to all properties, assets, rights, approvals,
immunities and franchises of AB and/or Annapolis, the officers
and directors of the Surviving Company and/or Surviving Bank
shall take all such necessary action.
ARTICLE II
Effect of Transaction on Common Stock, Assets, Liabilities
and Capitalization of Crestar, Crestar Bank MD, AB and
Annapolis
2.1. Conversion of Stock; Exchange Ratio; Cash
Election. At the Effective Time of the Holding Company Merger:
(a) Conversion of Stock. Each share of AB Common
Stock which is issued and outstanding at the Effective
Time of the Holding Company Merger (other than shares
held by Crestar, shares to be exchanged for cash and
Dissenting Shares (as defined in Section 2.4)) shall, and
without any action by the holder thereof, be converted
into the number of shares of Crestar Common Stock
determined in accordance with subsection 2.1(b). All
such shares shall be validly issued, fully paid and
nonassessable.
(b) Exchange Ratio. Each share of AB Common Stock
(other than shares held by Crestar, shares to be
exchanged for cash and Dissenting Shares) shall be
converted into the number of shares of Crestar Common
Stock determined by dividing $12.75 per share of AB
Common Stock (the "Price Per Share") by the average
closing price of Crestar Common Stock as reported on the
New York Stock Exchange for each of the 20 trading days
ending on the third day prior to the Closing Date
established pursuant to Section 6.1 (the "Average Closing
Price") (the result of the quotient determined by
dividing the Price Per Share by the Average Closing Price
and rounded to the nearest thousandths decimal point
being hereinafter called the "Exchange Ratio").
The Exchange Ratio at the Effective Time of the
Holding Company Merger shall be adjusted to reflect any
consolidation, split-up, other subdivisions or
combinations of Crestar Common Stock, any dividend
payable in Crestar Common Stock, or any capital
reorganization involving the reclassification of Crestar
Common Stock subsequent to the date of this Agreement.
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(c) Cash Election. Holders of shares of AB Common
Stock will be given the option of exchanging their shares
for the Price Per Share in cash (less all
applicable withholding taxes), provided that the number of shares
that may be exchanged for cash, when added to Dissenting
Shares, shall not exceed 30% of the outstanding shares of
AB Common Stock immediately prior to the Effective Time
of the Holding Company Merger. The cash election must be
made at the time AB shareholders vote on the Holding
Company Merger, and, once such vote has been taken, cash
elections shall be irrevocable. If the aggregate of
(i) shares for which a cash election is made and
(ii) Dissenting Shares exceeds 30% of the outstanding
shares of AB Common Stock immediately prior to
the Effective Time of the Holding Company Merger, Crestar
first will pay cash for shares submitted for cash
exchange by each holder of 100 or fewer AB shares (if
such holder has submitted all his shares for cash
exchange) and then will pay cash for shares submitted for
cash pro rata. Shares not exchanged for cash after
proration will be exchanged for Crestar Common Stock at
the Exchange Ratio.
2.2. Manner of Exchange. (a) After the Effective
Time of the Holding Company Merger, each holder of
a certificate for theretofore outstanding shares of AB
Common Stock, upon surrender of such certificate to
Crestar Bank (which shall act as exchange agent), and a
Letter of Transmittal, which shall be mailed to each
holder of a certificate for theretofore outstanding
shares of AB Common Stock by Crestar Bank promptly
following the Effective Time of the Holding Company
Merger, shall be entitled to receive in exchange therefor
a certificate or certificates representing the number of
full shares of Crestar Common Stock for which shares of
AB Common Stock theretofore represented by
the certificate or certificates so surrendered shall have
been exchanged as provided in this Article II, or cash if
the cash option provided in subsection 2.1(c) is properly
elected, or, in the event of proration, a combination of
cash and Crestar Common Stock. Until so surrendered,
each outstanding certificate which, prior to the
Effective Time of the Holding Company Merger, represented
AB Common Stock will be deemed to evidence the right to
receive either (i) the number of full shares of Crestar
Common Stock into which the shares of AB Common Stock
represented thereby may be converted in accordance with
the Exchange Ratio, or (ii) the Price Per Share
multiplied by the number of shares represented by such
certificate (less all applicable withholding taxes) in
cash if the cash option provided in subsection 2.1(c) was
properly elected, or (iii) a combination thereof; and,
after the Effective Time of the Holding Company Merger
(unless the cash option was properly elected), will be
deemed for all corporate purposes of Crestar to evidence
ownership of the number of full shares of Crestar Common
Stock into which the shares of AB Common Stock
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represented thereby were converted.
(b) As respects shares of AB Common Stock to
be converted into Crestar Common Stock, until such
outstanding certificates formerly representing AB Common
Stock are surrendered, no dividend payable to holders of
record of Crestar Common Stock for any period as of any
date subsequent to the Effective Time of the Holding
Company Merger shall be paid to the holder of such
outstanding certificates in respect thereof. After the
Effective Time of the Holding Company Merger, there shall
be no further registry of transfer on the records of AB
of shares of AB Common Stock. If a certificate
representing such shares is presented to Crestar, it
shall be canceled and exchanged for a certificate
representing shares of Crestar Common Stock as herein
provided. Upon surrender of certificates of AB Common
Stock in exchange for Crestar Common Stock, there shall
be paid to the recordholder of the certificates of
Crestar Common Stock issued in exchange therefor (i) the
amount of dividends theretofore paid with respect to such
full shares of Crestar Common Stock as of any date
subsequent to the Effective Time of the Holding Company
Merger which have not yet been paid to a public official
pursuant to abandoned property laws and (ii) at
the appropriate payment date the amount of dividends with a
record date after the Effective Time of the Holding
Company Merger but prior to surrender and a payment date
subsequent to surrender. No interest shall be payable
with respect to such dividends upon surrender of
outstanding certificates.
(c) At the Effective Time of the Holding Company
Merger, each share of AB Common Stock held by Crestar
shall be canceled, retired and cease to exist and each
Dissenting Share shall be treated in accordance
with Section 262 of the Delaware General Corporation Law.
2.3. No Fractional Shares. No certificates or scrip
for fractional shares of Crestar Common Stock will be issued. In
lieu thereof, Crestar will pay the value of such fractional
shares in cash on the basis of the price of Crestar Common Stock
used to determine the Exchange Ratio.
2.4. Dissenting Shares. Notwithstanding anything in
this Agreement to the contrary, shares of AB Common Stock which
are issued and outstanding immediately prior to the Effective
Time of the Holding Company Merger and which are held by a
shareholder who has the right (to the extent such right is
available by law) to demand and receive payment of the fair value
of his shares of AB Common Stock ("Dissenting Shares") pursuant
to Section 262 of the Delaware General Corporation Law shall not
be converted into or be exchangeable for the right to receive the
consideration provided in Section 2.1 of this Agreement, unless
and until such holder shall fail to perfect his or her right to
an appraisal or shall have effectively withdrawn or lost such
right under the Delaware General Corporation Law, as the case may
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be. If such holder shall have so failed to perfect his right to
dissent or shall have effectively withdrawn or lost such right,
each of his shares of AB Common Stock shall thereupon be deemed
to have been converted into, at the Effective Time of the Holding
Company Merger, the right to receive shares of Crestar Common
Stock as provided in subsection 2.1(a).
2.5. Assets. At the Effective Time of the Holding
Company Merger, the corporate existence of AB shall be merged
into and continued in Crestar as the Surviving Company. At the
Effective Time of the Bank Merger, the corporate existence of
Annapolis shall be merged directly or indirectly into and
continued in Crestar Bank MD as the Surviving Bank. All rights,
franchises and interests of AB and of Annapolis in and to any
type of property and chooses in action shall be transferred to
and vested in the Surviving Company or the Surviving Bank, as
applicable, by virtue of the Holding Company Merger and the Bank
Merger without any deed or other transfer. The Surviving Company
or the Surviving Bank, as applicable, without any order or other
action on the part of any court or otherwise, shall hold and
enjoy all rights of property, franchises and interests, including
appointments, designations and nominations, and all other rights
and interests as trustee, executor, administrator, transfer agent
or registrar of stocks and bonds, guardian of estates, assignee,
receiver and committee, and in every other fiduciary capacity, in
the same manner and to the same extent as such rights, franchises
and interests were held or enjoyed by AB or Annapolis at the
Effective Time of the Holding Company Merger and the Effective
Time of the Bank Merger, as provided in section
13.1-721 of the
Virginia Stock Corporation Act ("VSCA") and
section 259, section 261 and
section 328 of the Delaware General Corporation Law, and
section 3-712 of the
Maryland Financial Institutions Article and
section 3-114 of the
Maryland Corporations and Associations Article, as applicable.
2.6. Liabilities. At the Effective Time of the
Holding Company Merger, the Surviving Company shall be liable for
all liabilities of AB, as provided in section 13.1-721 of the VSCA. At
the Effective Time of the Bank Merger, the Surviving Bank shall
be liable for all liabilities of Annapolis, as provided in
section 3-712 of the Maryland Financial Institutions Article and
section 3-114 of
the Maryland Corporations and Associations Article. All
deposits, debts, liabilities and obligations of AB and of
Annapolis, accrued, absolute, contingent or otherwise, and
whether or not reflected or reserved against on balance sheets,
books of accounts, or records of AB or of Annapolis shall be
those of the Surviving Company or of the Surviving Bank, as
applicable, and shall not be released or impaired by the
Holding Company Merger or the Bank Merger. All rights of creditors and
other obligees and all liens on property of AB or of Annapolis
shall be preserved unimpaired. Crestar acknowledges its
obligation to provide, and agrees to provide, indemnification to
AB and Annapolis directors, officers and certain other persons,
and to advance expenses incurred in connection therewith, to the
extent set forth in Section 8.2 hereof. Crestar agrees to
provide coverage under its officers and directors liability
insurance policy after the Effective Time of the Holding Company
Merger to the directors and officers of AB and Annapolis to the
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same extent that such coverage is provided to officers and
directors of Crestar and Crestar Bank MD.
ARTICLE III
Representations and Warranties
3.1. Representations and Warranties of AB and
Annapolis. AB and Annapolis represent and warrant to Crestar and
Crestar Bank MD as follows:
(a) Organization, Standing and Power. AB is a
corporation duly organized, validly existing and in good
standing under the laws of Delaware and has all requisite
power and authority to own, lease and operate its
properties and to carry on its business as now being
conducted. AB has delivered to Crestar complete and
correct copies of (i) its Articles of Incorporation and
all amendments thereto to the date hereof and (ii) its
By-laws as amended to the date hereof.
Annapolis is a stock savings bank duly organized,
validly existing and in good standing under the laws of
the United States and has all requisite power and
authority to own, lease and operate its properties and to
carry on its businesses as now being conducted. AB has
delivered to Crestar complete and correct copies of
(i) the Charter of Annapolis and all amendments thereto
to the date hereof and (ii) the By-laws of Annapolis as
amended to the date hereof.
(b) Capital Structure. The authorized capital stock
of AB consists of 3,000,000 shares of AB Common Stock and
2,000,000 shares of preferred stock. On the date hereof,
1,205,500 shares of AB Common Stock were outstanding and
no shares of AB preferred stock were outstanding. All of
the outstanding shares of AB Common Stock were validly
issued, fully paid and nonassessable.
The authorized capital stock of Annapolis consists of
3,000,000 shares of common stock and 2,000,000 shares of
preferred stock. On the date hereof (i) 100 shares of
Annapolis common stock were outstanding and all of such
outstanding shares were validly issued, fully paid and
nonassessable and (ii) no shares of Annapolis preferred
stock were outstanding. AB owns all of the issued and
outstanding common stock of Annapolis free and clear of
any liens, claims, encumbrances, charges or rights of
third parties of any kind whatsoever, except that AB has
pledged all of the shares of common stock of Annapolis to
First National Bank of Maryland to secure its loan from
First National Bank of Maryland (the "FNBM Loan").
All outstanding shares of AB Common Stock have been
issued in compliance with the applicable requirements of
the Securities Act of 1933 (the "1933 Act"). AB knows of
no person who beneficially owns 5% or more of the
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outstanding AB Common Stock as of the date hereof, except
as disclosed on Schedule A.
(c) Authority. Subject to the approval of this
Agreement and the Holding Company Plan of Merger by the
shareholders of AB as contemplated by Section 4.2 hereof
and the approval of First National Bank of Maryland if
the FNBM Loan is not paid in full as provided in Section
8.1 hereof, the execution and delivery of this Agreement
and the consummation of the transactions contemplated
hereby and thereby and by the Holding Company Plan of
Merger have been duly and validly authorized by all
necessary action on the part of AB, and this Agreement is
a valid and binding obligation of AB, enforceable
in accordance with its terms. The execution and delivery of
this Agreement, the consummation of the transactions
contemplated hereby and by the Holding Company Plan of
Merger and compliance by AB with any of the provisions
hereof will not (i) conflict with or result in a breach
of any provision of its Articles of Incorporation or By-
laws or, except as set forth in Schedule D, a default (or
give rise to any right of termination, cancellation or
acceleration) under any of the terms, conditions or
provisions of any note, bond, debenture, mortgage,
indenture, license, material agreement or other
material instrument or obligation to which AB is a party, or by
which it or any of its properties or assets may be bound,
or (ii) violate any order, writ, injunction, decree,
statute, rule or regulation applicable to AB or any of
its properties or assets. No consent or approval by any
governmental authority, other than compliance with
applicable federal and state securities and banking laws,
and regulations of the Board of Governors of the Federal
Reserve System (the "Federal Reserve Board"), the Office
of Thrift Supervision (the "OTS"), and the Maryland Bank
Commissioner, Division of Financial Regulation (the
"Maryland Bank Division"), is required in connection with
the execution and delivery by AB of this Agreement or the
consummation by AB of the transactions contemplated
hereby or by the Holding Company Plan of Merger.
The execution and delivery of this Agreement and the
consummation of the transactions contemplated hereby and
by the Thrift Plan of Merger and the Bank Plan of Merger,
as applicable, have been duly and validly authorized by
all necessary action on the part of Annapolis, and this
Agreement is a valid and binding obligation of
Annapolis, enforceable in accordance with its terms. The execution
and delivery of this Agreement, the consummation of the
transactions contemplated hereby and by the Thrift Plan
of Merger and the Bank Plan of Merger, as applicable, and
compliance by Annapolis with any of the provisions hereof
will not (i) conflict with or result in a breach of any
provision of its Charter or By-laws or, except as set
forth in Schedule D, a default (or give rise to any right
of termination, cancellation or acceleration) under any
of the terms, conditions or provisions of any note, bond,
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debenture, mortgage, indenture, license, material
agreement or other material instrument or obligation to
which Annapolis is a party, or by which it or any of its
properties or assets may be bound, or (ii) violate any
order, writ, injunction, decree, statute, rule or
regulation applicable to Annapolis or any of its
properties or assets. No consent or approval by any
governmental authority, other than compliance with
applicable federal and state securities and banking laws,
and regulations of the Federal Reserve Board, the OTS and
the Maryland Bank Division, is required in connection
with the execution and delivery by Annapolis of this
Agreement or the consummation by Annapolis of the
transactions contemplated hereby or by the Thrift Plan
of Merger and the Bank Plan of Merger, as applicable.
(d) Investments. All securities owned by AB and
Annapolis of record and beneficially are free and clear
of all mortgages, liens, pledges, encumbrances or any
other restriction, whether contractual or statutory,
which would materially impair the ability of AB or
Annapolis freely to dispose of any such security at any
time, except as noted on Schedule A. Any securities
owned of record by AB and Annapolis in an amount equal to
5% or more of the issued and outstanding
voting securities of the issuer thereof have been noted on such
Schedule A. There are no voting trusts or other
agreements or undertakings with respect to the voting of
such securities. With respect to all repurchase
agreements to which AB or Annapolis is a party, AB or
Annapolis has a valid, perfected first lien or security
interest in the government securities or other collateral
securing the repurchase agreement, and the value of the
collateral securing each such repurchase agreement equals
or exceeds the amount of the debt secured by such
collateral under such agreement.
(e) Financial Statements. AB has on or prior to the
date hereof delivered to Crestar copies of the following
consolidated financial statements of AB (the "AB
Financial Statements"):
(i) Consolidated Balance Sheets as of
September 30, 1993, 1992 and 1991 (audited);
(ii) Consolidated Statements of Operations for
each of the three years ended September 30, 1993,
1992, and 1991 (audited);
(iii) Consolidated Statements of Shareholders'
Equity for each of the three years ended September
30, 1993, 1992 and 1991 (audited); and
(iv) Consolidated Statements of Cash Flows for
each of the three years ended September 30, 1993,
1992 and 1991 (audited).
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Such consolidated financial statements and the notes
thereto have been prepared in accordance with generally
accepted accounting principles applied on a consistent
basis throughout the periods indicated. Except as set
forth in Schedule A-1, each of such consolidated balance
sheets, together with the notes thereto, presents fairly
as of its date the consolidated financial condition and
assets and liabilities of AB. The consolidated
statements of operations, shareholders' equity and cash
flows, together with the notes thereto, present fairly
the consolidated results of operations, shareholders'
equity and cash flows of AB for the periods indicated.
Except as disclosed in the AB Financial Statements
and the provision for dividend payments under the Amended
and Restated Loan Agreement (the "AB Loan Agreement")
dated as of September 16, 1993 by and among AB, Annapolis
and First National Bank of Maryland, and in the case of
Annapolis the requirements of 12 C.F.R.
section 563.134, there
are no restrictions precluding AB or Annapolis from
paying dividends when, as and if declared by their
respective boards of directors.
(f) Absence of Undisclosed Liabilities. At June 30,
1993 and September 30, 1993, AB had no obligations
or liabilities (contingent or otherwise) of any nature which
were not reflected in the AB balance sheets as of such
dates, or disclosed in the notes thereto, except for
those which in the aggregate are not material to the
financial condition, results of operations, business or
prospects of AB on a consolidated basis and except as
disclosed in Schedules specifically referred to herein.
(g) Tax Matters. Annapolis and all other
subsidiaries of AB are members of the same "affiliated
group," as defined in Section 1504(a)(1) of the Code, as
AB (collectively, the "AB Group"). Each member of the AB
Group has filed or caused to be filed or (in the case of
returns or reports not yet due) will file all tax returns
and reports required to have been filed by or for it
before the Effective Time of the Holding Company Merger,
and all information set forth in such returns or reports
is or (in the case of such returns or reports not yet
due) will be accurate and complete in all material
respects. Each member of the AB Group has paid or made
adequate provision in all material respects for or (with
respect to returns or reports not yet filed) before
the Effective Time of the Holding Company Merger will pay or
make adequate provision for all taxes, additions to tax,
penalties, and interest for all periods covered by those
returns or reports. Except as disclosed on Schedule B,
there are, and at the Effective Time of the Holding
Company Merger will be, no unpaid taxes, additions to
tax, penalties, or interest due and payable by any member
of the AB Group or by any other person that are or could
become a lien on any asset or otherwise adversely affect
the business, property or financial condition of any
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member of the AB Group. Each member of the AB Group has
collected or withheld, or will collect or withhold before
the Effective Time of the Holding Company Merger,
all amounts required to be collected or withheld by it for
any taxes, and all such amounts have been, or before the
Effective Time of the Holding Company Merger will have
been, paid to the appropriate governmental agencies or
set aside in appropriate accounts for future payment when
due. Each member of the AB Group is in material
compliance with, and its records contain all information
and documents (including, without limitation, properly
completed IRS Forms W-9) necessary to comply in all
material respects with, all information reporting and tax
withholding requirements under federal, state, and local
laws, rules, and regulations, and such records identify
with specificity all accounts subject to backup
withholding under Section 3406 of the Code. The
consolidated balance sheets contained in the AB Financial
Statements fully and properly reflect, as of the dates
thereof, the aggregate liabilities of the members of the
AB Group for all accrued taxes, additions to tax,
penalties and interest in all material respects. For
periods ending after September 30, 1993, the books and
records of each member of the AB Group fully and properly
reflect its liability for all accrued taxes, additions to
tax, penalties and interest. Except as disclosed in
Schedule B, no member of the AB Group has granted (nor is
it subject to) any waiver of the period of limitations
for the assessment of tax for any currently open taxable
period, and no unpaid tax deficiency has been asserted
against or with respect to any member of the AB Group by
any taxing authority. No member of the AB Group has made
or entered into, or holds any asset subject to, a consent
filed pursuant to Section 341(f) of the Code and the
regulations thereunder or a "safe harbor lease" subject
to former Section 168(f)(8) of the Code and
the regulations thereunder. Schedule B describes all tax
elections, consents and agreements affecting any member
of the AB Group for any tax period beginning on or after
January 1, 1987, and all such material elections,
consents and agreements for any prior period. To the
best knowledge of AB, no AB shareholder is a "foreign
person" for purposes of Section 1445 of the Code.
(h) Options, Warrants and Related Matters. There
are no outstanding unexercised options, warrants, calls,
commitments or agreements of any character to which AB
or Annapolis is a party or by which it is bound, calling for
the issuance of securities of AB or Annapolis or any
security representing the right to purchase or otherwise
receive any such security, except (i) as set forth on
Schedule C and (ii) the Option Agreement.
(i) Property. AB and Annapolis own (or enjoy use of
under capital leases) all property reflected on the AB
consolidated balance sheet as of September 30, 1993
(except property sold or otherwise disposed of in the
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ordinary course of business). All property shown as
being owned is owned free and clear of all mortgages,
liens, pledges, charges or encumbrances of any
nature whatsoever, except those referred to in such AB balance
sheet or the notes thereto, liens for current taxes not
yet due and payable, any unfiled mechanics' liens and
such encumbrances and imperfections of title, if any, as
are not substantial in character or amount or otherwise
materially impair AB's consolidated business operations.
The leases relating to leased property are fairly
reflected in such AB balance sheet.
All property and assets material to the business or
operations of AB and Annapolis are in substantially
good operating condition and repair and such property and
assets are adequate for the business and operations of AB
and Annapolis as currently conducted.
(j) Additional Schedules Furnished to Crestar. In
addition to any Schedules furnished to Crestar pursuant
to other provisions of this Agreement, AB has furnished
to Crestar the following Schedules which are correct and
complete as of the date hereof in all material respects:
(1) Employees. Schedule C lists as of the
date hereof (A) the names of and current annual salary
rates for all present employees of AB and Annapolis
who received, respectively, $60,000 or more in
aggregate compensation, whether in salary or
otherwise, during the year ended September 30, 1993,
or are presently scheduled to receive salary in
excess of $60,000 during the year ending September
30, 1994, (B) the names of all holders of AB Options
and the number of AB Options held by each such person
and the exercise price of each such AB Option,
(C) the number of shares of AB Common Stock
owned beneficially by each director of AB and Annapolis as
of the date hereof, and (D) the names of and the
number of shares of AB Common Stock owned by each
person who beneficially owns 5% or more of the
outstanding AB Common Stock as of the date hereof.
(2) Certain Contracts. Schedule D lists all
material notes, bonds, mortgages, indentures,
licenses, lease agreements and other contracts and
obligations to which AB or Annapolis is a party as of
the date hereof except for those entered into by AB
or Annapolis in the ordinary course of its banking
business consistent with its prior practice and that
does not involve an amount greater than $100,000.
(3) Employment Contracts and Related Matters.
Except in all cases as set forth on Schedule E,
neither AB nor Annapolis is a party to (A) any
employment contract not terminable at the option of
AB or Annapolis without liability, (B) any
retirement, stock option, profit sharing or pension
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plan or thrift plan or agreement or employee benefit
plan (as defined in Section 3 of the Employee
Retirement Income Security Act of 1974 ("ERISA")),
(C) any management or consulting agreement not
terminable at the option of AB or Annapolis without
liability or (D) any union or labor agreement.
(4) Real Estate. Schedule F describes, as of
the date hereof, all interests in real property
owned, leased or otherwise claimed by AB and
Annapolis, including other real estate owned.
(5) Affiliates. Schedule G sets forth the names
and number of shares of AB Common Stock owned as of
the date hereof beneficially or of record by any
persons AB considers to be affiliates of AB ("AB
Affiliates") as that term is defined for purposes of
Rule 145 under the 1933 Act.
(k) Agreements in Force and Effect. All material
contracts, agreements, plans, leases, policies and
licenses referred to in any Schedule of AB or Annapolis
referred to herein are valid and in full force and
effect, and AB or Annapolis have not breached any
material provision of, nor are in default in any
material respect under the terms of, any such contract, agreement,
lease, policy or license, the effect of which breach or
default would have a material adverse effect upon the
financial condition, results of operations, business or
prospects of AB on a consolidated basis.
(l) Legal Proceedings; Compliance with Laws. Except
as set forth in Schedule H, there is no legal,
administrative, arbitration or other proceeding or
governmental investigation pending (including any legal,
administrative, arbitrative or other proceeding
or governmental investigation involving a violation of the
federal antitrust laws) other than foreclosure
proceedings involving real estate property with a fair
market value of less than $250,000, or, to the knowledge
of AB's or Annapolis's management, threatened or probable
of assertion. Except as set forth in Schedule H, AB and
Annapolis have complied in all material respects with any
laws, ordinances, requirements, regulations or orders
applicable to their respective businesses, except where
noncompliance would not have a material adverse effect on
the financial condition, results of operations, business
or prospects of AB on a consolidated basis. AB and
Annapolis have all licenses, permits, orders or approvals
of any federal, state, local or foreign governmental or
regulatory body that are necessary for the conduct of the
respective businesses of AB or Annapolis and the absence
of which would have a material adverse effect on the
financial condition, results of operations, business or
prospects of AB on a consolidated basis (collectively,
the "Permits"); the Permits are in full force and effect;
neither AB nor Annapolis is aware of any material
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violations that are or have been recorded in respect of
any Permits nor has AB or Annapolis received notice of
any violations; and no proceeding is pending or, to
the knowledge of AB or Annapolis, threatened to revoke or
limit any Permit. Except as set forth in Schedule H,
neither AB nor Annapolis has entered into any agreements
or written understandings with the OTS, the Federal
Deposit Insurance Corporation (the "FDIC") or the
Maryland Bank Division or any other regulatory agency
having authority over either of them. Neither AB nor
Annapolis is subject to any judgment, order, writ,
injunction or decree which materially adversely affects,
or might reasonably be expected materially adversely to
affect, the financial condition, results of
operations, business or prospects of AB on a consolidated basis.
(m) Employee Benefit Plans.
(1) Schedule E includes a correct and complete
list of, and Crestar has been furnished a true and
correct copy of (or an accurate description thereof
in the case of oral agreements), (A) all qualified
pension and profit-sharing plans, all deferred
compensation, consultant, severance, thrift, option,
bonus and group insurance contracts and all
other incentive, welfare and employee benefit plans, trust,
annuity or other funding agreements, and all other
agreements (including oral agreements) that are
presently in effect, or have been approved prior to
the date hereof, maintained for the benefit of
employees or former employees of AB or Annapolis or
the dependents or beneficiaries of any employee or
former employee of AB or Annapolis, whether or not
subject to ERISA (the "Employee Plans"), (B) the most
recent actuarial and financial reports prepared or
required to be prepared with respect to any Employee
Plan and (C) the most recent annual reports filed
with any governmental agency, the most recent
favorable determination letter issued by the Internal
Revenue Service, and any open requests for rulings or
determination letters, that pertain to any such
qualified Employee Plan. Schedule E identifies each
Employee Plan that is intended to be qualified under
Section 401(a) of the Code and each such plan is
qualified.
(2) Neither AB, Annapolis nor any
employee pension benefit plan (as defined in Section 3(2) of
ERISA (a "Pension Plan")) maintained or previously
maintained by it, has incurred any material liability
to the Pension Benefit Guaranty Corporation ("PBGC")
or to the Internal Revenue Service with respect to
any Pension Plan. There is not currently pending
with the PBGC any filing with respect to any
reportable event under Section 4043 of ERISA nor has
any reportable event occurred as to which a filing is
required and has not been made.
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(3) Full payment has been made (or proper
accruals have been established) of all contributions
which are required for periods prior to Closing under
the terms of each Employee Plan, ERISA, or a
collective bargaining agreement, no accumulated
funding deficiency (as defined in Section 302 of
ERISA or Section 412 of the Code) whether or not
waived, exists with respect to any Pension Plan
(including any Pension Plan previously maintained by
AB or Annapolis), and there is no "unfunded current
liability" (as defined in Section 412 of the Code)
with respect to any Pension Plan.
(4) No Employee Plan is a "multiemployer plan"
(as defined in Section 3(37) of ERISA). Neither AB
nor Annapolis has incurred any material liability
under Section 4201 of ERISA for a complete or partial
withdrawal from a multiemployer plan (as defined in
Section 3(37) of ERISA). Neither AB nor Annapolis
has participated in or agreed to participate in, a
multiemployer plan (as defined in Section 3(37) of
ERISA).
(5) All "employee benefit plans," as defined in
Section 3(3) of ERISA, that are maintained by AB
or Annapolis and all "employee benefit plans," as
defined in Section 3(3) of ERISA that were previously
maintained by AB or Annapolis comply and have been
administered in compliance in all material respects
with ERISA and all other applicable legal
requirements, including the terms of such plans,
collective bargaining agreements and securities laws.
Neither AB nor Annapolis has any material liability
under any such plan that is not reflected in the AB
Financial Statements.
(6) No prohibited transaction has occurred with
respect to any Employee Plan that is an "employee
benefit plan" (as defined in Section 3(3) of ERISA)
maintained by AB or Annapolis or any "employee
benefit plan" as defined in Section 3(3) of ERISA
that was previously maintained by AB or Annapolis
that would result, directly or indirectly, in
material liability under ERISA or in the imposition
of a material excise tax under Section 4975 of the
Code.
(7) Schedule E identifies each Employee Plan
that is an "employee welfare benefit plan" (as
defined in Section 3(1) of ERISA) and which is
funded. The funding under each such plan does not
exceed the limitations under Section 419A(b) or
419A(c) of the Code. Neither AB nor Annapolis are
subject to taxation on the income of any such plan or
any such plan previously maintained by AB or
Annapolis.
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(8) Schedule E identifies the method of funding
(including any individual accounting) for all post-
retirement medical or life insurance benefits for
the employees of AB and Annapolis. Schedule E also
discloses the funded status of these Employee Plans.
(9) AB, Annapolis and their direct or indirect
subsidiaries identified in this Agreement are the
only trades or businesses which are, or have ever
been, treated as a single employer for employee
benefit purposes under ERISA and the Code.
(n) Insurance. All policies or binders of fire,
liability, product liability, workmen's
compensation, vehicular and other insurance held by or on behalf of AB
or Annapolis are described on Schedule I and are valid
and enforceable in accordance with their terms, are in
full force and effect, and insure against risks and
liabilities to the extent and in the manner customary for
the industry and are deemed appropriate and sufficient by
AB and Annapolis. Neither AB nor Annapolis is in default
with respect to any provision contained in any such
policy or binder and has not failed to give any notice or
present any claim under any such policy or binder in due
and timely fashion, in either case where such default
or failure to give notice or present any claim would have a
material adverse effect on the financial condition,
results of operations, business or prospects of AB on a
consolidated basis. Neither AB nor Annapolis has
received notice of cancellation or non-renewal of any
such policy or binder. Neither AB nor Annapolis has
knowledge of any inaccuracy in any application for such
policies or binders, any failure to pay premiums when due
or any similar state of facts that might form the basis
for termination of any such insurance. Neither AB nor
Annapolis has knowledge of any state of facts or of
the occurrence of any event that is reasonably likely to form
the basis for any material claim against it not fully
covered (except to the extent of any applicable
deductible) by the policies or binders referred to above.
Neither AB nor Annapolis has received notice from any of
its insurance carriers that any insurance premiums will
be materially increased in the future or that any such
insurance coverage will not be available in the future on
substantially the same terms as now in effect.
(o) Loan Portfolio. Except for the FNBM Loan, AB
has no loans outstanding. Each loan outstanding on the
books of Annapolis is reflected correctly in all material
respects by the loan documentation, was made in the
ordinary course of business, was not known to be
uncollectible at the time it was made, and was made in
accordance with Annapolis's standard loan policies. The
records of Annapolis regarding all loans outstanding on
its books are accurate in all material respects. The
reserves for possible loan losses on the outstanding
loans of Annapolis and the reserves for other real estate
I-16
owned by Annapolis as reflected in the AB Financial
Statements, have been established in accordance with
generally accepted accounting principles and with
the requirements of the OTS, and in the best judgment of the
management of AB, are adequate to absorb all material
known and anticipated loan losses in the loan portfolio
of Annapolis, and any losses associated with other real
estate owned or held by Annapolis. Except as identified
on Schedule J, no loan in excess of $50,000 has been
classified as of the date hereof by Annapolis or
regulatory examiners as "Other Loans Specifically
Mentioned", "Substandard", "Doubtful" or "Loss". Except
as identified on Schedule J, each loan reflected as an
asset on the AB balance sheets is, to the knowledge of AB
and Annapolis, the legal, valid and binding obligation of
the obligor and any guarantor, subject to bankruptcy,
insolvency, fraudulent conveyance and other laws of
general applicability relating to or affecting creditor's
rights and to general equity principles, and no defense,
offset or counterclaim has been asserted with respect to
any such loan which if successful would have a material
adverse effect on the financial condition, results of
operations, business or prospects of AB on a consolidated
basis.
(p) Absence of Changes. Since June 30, 1993 there
has not been any material adverse change in the
consolidated financial condition, results of operations,
business or prospects of AB, other than changes resulting
from or attributable to (i) changes since such date in
laws or regulations, generally accepted accounting
principles or interpretations of either thereof that
affect the banking or savings and loan industries
generally, (ii) changes since such date in the general
level of interest rates, (iii) expenses since such date
incurred in connection with the transactions contemplated
by this Agreement, (iv) accruals and reserves by AB or
Annapolis since such date pursuant to the terms of
Section 4.8 hereof or (v) any other accruals, reserves or
expenses incurred by AB or Annapolis since such date with
Crestar's prior written consent. Since June 30, 1993 the
business of AB has been conducted only in the ordinary
course.
For purposes of this Section 3.1(p) and Section
5.1(a), material adverse change shall mean (1) a 10%
reduction or more of AB's shareholders equity since June
30, 1993, or (2) AB and Annapolis's representations and
warranties are not true and correct in all material
respects as of the date hereof or the Closing Date only
if the untruth or incorrectness of any such
representations and warranties, in the aggregate, as of
the date hereof or the Closing Date, could, and in
Crestar's judgement, exercised reasonably, would result
in a reduction of 10% or more of AB shareholders' equity
since June 30, 1993; provided, however, that in either
case, such reduction of 10% or more of AB's shareholders'
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equity shall be exclusive of any change in AB's
shareholders' equity resulting from any mark-to-market
accounting and interest rate credit or
reserve adjustments of which Crestar has informed AB as disclosed
on Annex VII attached hereto or otherwise required under
Section 4.8.
(q) Brokers and Finders. Neither AB, Annapolis nor
any of their respective officers, directors or employees
have employed any broker or finder or incurred any
liability for any brokerage fees, commissions or finders'
fees in connection with the transactions contemplated
herein except for the engagement of Kaplan Associates,
Inc. which requires total payments of
approximately $340,000 subject to adjustment as determined in
accordance with Annex IX hereof.
(r) Subsidiaries. AB's only subsidiaries, direct or
indirect, are in addition to Annapolis, Annapolis Federal
Funding Corporation I, Maryland Service Corporation,
Maryland Service Insurance Corporation, and Maryland
Service Development Corporation. Such corporations are
duly organized, validly existing and in good standing
under the laws of their jurisdiction of incorporation and
have all requisite corporate power and authority to own,
lease and operate their properties and to carry on their
business as now being conducted in all material respects.
AB owns, directly or indirectly, all of the issued and
outstanding common stock of its subsidiaries free and
clear of any liens, claims, encumbrances, charges or
rights of third parties of any kind whatsoever, except
that AB has pledged all of the shares of common stock of
Annapolis to First National Bank of Maryland to secure
the FNBM Loan.
(s) Reports. Since October 1, 1989, AB
and Annapolis have filed all material reports and statements,
together with any amendments required to be made with
respect thereto, that were required to be filed with
(i) the OTS (or predecessors), (ii) the FDIC, (iii) the
Securities and Exchange Commission and (iv) any other
governmental or regulatory authority or agency having
jurisdiction over their operations. Neither AB nor
Annapolis is a reporting company under Section 12(g) or
15(d) of the Securities Exchange Act of 1934 (the "1934
Act") or the regulations of the OTS.
(t) Environmental Matters. For purposes of this
subsection, the following terms shall have the indicated
meaning:
"Environmental Law" means any federal, state or local
law, statute, ordinance, rule, regulation, code, license,
permit, authorization, approval, consent, order,
judgment, decree, injunction or agreement with any
governmental entity relating to (i) the protection,
preservation or restoration of the environment
I-18
(including, without limitation, air, water vapor, surface
water, groundwater, drinking water supply, surface soil,
subsurface soil, plant and animal life or any
other natural resource), and/or (ii) the use, storage,
recycling, treatment, generation, transportation,
processing, handling, labeling, production, release or
disposal of Hazardous Substances. The term
"Environmental Law" includes without limitation (i) the
Comprehensive Environmental Response, Compensation and
Liability Act, as amended, 42 U.S.C.
section 9601, et seq; the
Resource Conservation and Recovery Act, as amended, 42
U.S.C. section 6901, et
seq; the Clean Air Act, as amended, 42
U.S.C. section 7401, et seq; the Federal Water
Pollution
Control Act, as amended, 33 U.S.C.
section 1251, et seq; the
Toxic Substances Control Act, as amended, 15 U.S.C.
section 9601,
et seq; the Emergency Planning and Community
Right to Know Act, 42 U.S.C.
section 11001, et seq; the Safe
Drinking Water Act, 42 U.S.C.
section 300f, et seq; and all
comparable state and local laws, and (ii) any common law
(including without limitation common law that may impose
strict liability) that may impose liability or
obligations for injuries or damages due to, or threatened
as a result of, the presence of or exposure to any
Hazardous Substance.
"Hazardous Substance" means any substance presently
listed, defined, designated or classified as hazardous,
toxic, radioactive or dangerous, or otherwise regulated,
under any Environmental Law, whether by type or by
quantity, including any material containing any such
substance as a component. Hazardous Substances include
without limitation petroleum or any derivative or by-
product thereof, asbestos, radioactive material, and
polychlorinated biphenyls.
"Loan Portfolio Properties and Other
Properties Owned" means those properties owned or operated by AB or
Annapolis or any of their subsidiaries, including those
properties serving as collateral for any loans made by AB
or Annapolis.
To the best knowledge of AB and Annapolis, except as
set forth in Schedule K,
(i) neither AB nor Annapolis has been or is in
violation of or liable under any Environmental Law;
(ii) none of the Loan Portfolio Properties and
Other Properties Owned has been or is in violation of
or liable under any Environmental Law; and
(iii) there are no actions, suits, demands,
notices, claims, investigations or proceedings
pending or threatened relating to the liability of
the Loan Portfolio Properties and Other Properties
Owned under any Environmental Law, including without
limitation any notices, demand letters or requests
I-19
for information from any federal or state
environmental agency relating to any such liabilities
under or violations of Environmental Law, except in
the case of clauses (i), (ii) and (iii) above for
such violations and liabilities, and actions, suits,
demands, notices, claims, investigations or
proceedings, which would not singly or in the
aggregate have a material adverse effect on the
financial condition, results of operations, business
or prospects of AB on a consolidated basis.
(u) Delaware General Corporation Law, Etc. This
Agreement, the Holding Company Plan of Merger and the
Bank Plan of Merger have been approved by a majority of
the disinterested directors of AB and, as a result, the
provisions of Section 203 of the Delaware General
Corporation Law do not apply to the Merger and the other
transactions contemplated hereby. Assuming the accuracy
of the representation and warranty of Crestar set forth
in the last sentence of Section 3.2(h) hereof, neither
Crestar nor Crestar Bank MD are (i) an interested
stockholder, as defined in
section 203(c)(5) of the Delaware
General Corporation Law, and, as a result, the provisions
of Section 203 of the Delaware General Corporation Law do
not apply to the Merger and the other
transactions contemplated hereby and (ii) a Related Person, as defined
in Section 7.1.9 of the Certificate of Incorporation of
AB, and, as a result, the provisions of Article 7 of such
Certificate do not apply to the Merger and the other
transactions contemplated hereby.
(v) Disclosure. Except to the extent of any
subsequent correction or supplement with respect thereto
furnished prior to the date hereof, no written statement,
certificate, schedule, list or other written information
furnished by or on behalf of AB at any time to Crestar,
in connection with this Agreement when considered as a
whole, contains or will contain any untrue statement of a
material fact or omits or will omit to state a material
fact necessary in order to make the statements herein or
therein, in light of the circumstances under which they
were made, not misleading. Each document delivered or to
be delivered by AB to Crestar is or will be a true and
complete copy of such document, unmodified except by
another document delivered by AB.
(w) Conversion; Liquidation Account.
Annapolis's voluntary supervisory conversion on December 31, 1986
from a federally chartered mutual savings bank to a
federally chartered stock savings bank was effectuated in
accordance with the applicable rules and regulations of
the OTS. The OTS did not require the establishment of a
liquidation account in connection with the conversion.
3.2. Representations and Warranties of Crestar and
Crestar Bank MD. Crestar and Crestar Bank MD represent and
warrant to AB and Annapolis as follows:
I-20
(a) Organization, Standing and Power. Crestar is a
corporation duly organized, validly existing and in good
standing under the laws of Virginia and has all requisite
corporate power and authority to own, lease and operate
its properties and to carry on its business as now being
conducted. Crestar has delivered to AB complete and
correct copies of (i) its Articles of Incorporation and
all amendments thereto to the date hereof and (ii) its
By-laws as amended to the date hereof.
Crestar Bank MD is a banking corporation duly
organized, validly existing and in good standing under
the laws of Maryland and has all requisite corporate
power and authority to own, lease and operate its
properties and to carry on its businesses as now being
conducted. Crestar has delivered to AB complete and
correct copies of (i) the Articles of Incorporation of
Crestar Bank MD and all amendments thereto to the
date hereof and (ii) the By-laws of Crestar Bank MD as amended
to the date hereof.
(b) Capital Structure. The authorized capital stock
of Crestar consists of 100,000,000 shares of Common
Stock, of which 37,763,565 shares were issued and
outstanding as of September 30, 1993, and 2,000,000
shares of Preferred Stock, of which 900,000 shares
designated as Adjustable Rate Cumulative Preferred Stock,
Series B, were issued and outstanding as of September 30,
1993. All of such issued and outstanding shares
of Common and Preferred Stock were validly issued, fully
paid and nonassessable at such date.
The authorized capital stock of Crestar Bank MD
consists of 129,080 shares of common stock, $100 par
value, of which 122,100 shares were issued and
outstanding as of the date hereof, all of which shares
are owned by Crestar free and clear of any liens, claims,
encumbrances, charges or rights of third parties of any
kind whatsoever. All such issued and outstanding shares
of common stock of Crestar Bank MD were validly issued,
fully paid and nonassessable.
(c) Authority. The execution and delivery of this
Agreement and the consummation of the transactions
contemplated hereby have been duly and validly authorized
by all necessary action on the part of Crestar; and this
Agreement is a valid and binding obligation of Crestar,
enforceable in accordance with its terms. The execution
and delivery of this Agreement, the consummation of the
transactions contemplated hereby and compliance by
Crestar with any of the provisions hereof will not
(i) conflict with or result in a breach of any provision
of its Articles of Incorporation or By-laws or a default
(or give rise to any right of termination, cancellation
or acceleration) under any of the terms, conditions or
provisions of any note, bond, mortgage, indenture,
license, agreement or other instrument or obligation to
which Crestar is a party, or by which it or any of its
I-21
properties or assets may be bound or (ii) violate any
order, writ, injunction, decree, statute, rule or
regulation applicable to Crestar or any of its properties
or assets. No consent or approval by any governmental
authority, other than compliance with applicable federal
and state securities and banking laws, and regulations of
the Federal Reserve Board, the OTS and the Maryland
Bank Division is required in connection with the execution and
delivery by Crestar of this Agreement or the consummation
by Crestar of the transactions contemplated hereby or by
the Holding Company Plan of Merger.
The execution and delivery of this Agreement and the
consummation of the transactions contemplated hereby and
by the Thrift Plan of Merger, the Plan of Conversion and
the Bank Plan of Merger have been duly and validly
authorized by all necessary action on the part of Crestar
Bank MD, and this Agreement is a valid and
binding obligation of Crestar Bank MD, enforceable in accordance
with its terms. The execution and delivery of this
Agreement, the consummation of the transactions
contemplated hereby and by the Thrift Plan of Merger, the
Plan of Conversion and the Bank Plan of Merger and
compliance by Crestar Bank MD with any of the provisions
hereof or thereof will not (i) conflict with or result in
a breach of any provision of its Articles of
Incorporation or By-laws or a default (or give rise to
any right of termination, cancellation or acceleration)
under any of the terms, conditions or provisions of any
note, bond, mortgage, indenture, license, agreement or
other instrument or obligation to which Crestar Bank MD
is a party, or by which it or any of its properties or
assets may be bound, or (ii) violate any order, writ,
injunction, decree, statute, rule or regulation
applicable to Crestar Bank MD or any of its properties or
assets. No consent or approval by any government
authority, other than compliance with applicable federal
and state securities and banking laws, and regulations of
the Federal Reserve Board, the OTS and the Maryland Bank
Division, is required in connection with the execution
and delivery by Crestar Bank MD of this Agreement or the
consummation by Crestar Bank MD of the transactions
contemplated hereby or by the Bank Plan of Merger.
(d) Financial Statements. Crestar has on or prior
to the date hereof delivered to AB copies of the
following consolidated financial statements of Crestar
(the "Crestar Financial Statements"):
(i) Consolidated Balance Sheets as of December
31, 1992 and 1991 (audited) and as of September 30,
1993 and 1992 (unaudited);
(ii) Consolidated Income Statements for each of
the three years ended December 31, 1992, 1991, and
1990 (audited) and the nine months ended September
30, 1993 and 1992 (unaudited);
I-22
(iii) Consolidated Statements of Changes in
Shareholders' Equity for each of the three years
ended December 31, 1992, 1991 and 1990 (audited) and
the nine months ended September 30, 1993 and 1992
(unaudited); and
(iv) Consolidated Statements of Cash Flows for
each of the three years ended December 31, 1992, 1991
and 1990 (audited) and the nine months ended
September 30, 1993 and 1992 (unaudited).
Such consolidated financial statements and the notes
thereto have been prepared in accordance with generally
accepted accounting principles applied on a consistent
basis throughout the periods indicated. Each of such
consolidated balance sheets, together with the notes
thereto, presents fairly as of its date the financial
condition and assets and liabilities of Crestar.
The consolidated income statements, statements of changes in
shareholders' equity and statements of cash flows,
together with the notes thereto, present fairly the
results of operations, shareholders' equity and cash
flows of Crestar for the periods indicated.
(e) Absence of Undisclosed Liabilities. At
September 30, 1993, Crestar and its consolidated
subsidiaries had no liabilities, contingent or otherwise,
of any nature which were not reflected in the Crestar
balance sheet as of such date or disclosed in the
notes thereto, except for those which in the aggregate are not
material to the financial condition, results of
operations, business or prospects of Crestar on a
consolidated basis.
(f) Absence of Changes. Since September 30, 1993,
there has not been any material adverse change in the
consolidated financial condition, results of operations,
business or prospects of Crestar, other than changes
since such date resulting from or attributable to
(i) changes since such date in laws or
regulations, generally accepted accounting principles or
interpretations of either thereof that affect the banking
or savings and loan industries generally, (ii) changes
since such date in the general level of interest rates or
(iii) expenses incurred since such date in connection
with the transactions contemplated by this Agreement.
(g) Brokers and Finders. Neither Crestar, Crestar
Bank MD nor any of their respective officers, directors
or employees has employed any broker or finder or
incurred any liability for any brokerage
fees, commissions or finders' fees in connection with the
transactions contemplated herein.
(h) Subsidiaries; Ownership of AB Common Stock.
Crestar's first-tier subsidiaries are Crestar Bank,
Crestar Bank N.A., Crestar Bank MD, Crestar Insurance
Agency, Inc., and Crestar Securities Corporation. Such
I-23
corporations are duly organized, validly existing and in
good standing under the laws of their respective
jurisdictions of incorporation and have all requisite
corporate power and authority to own, lease and operate
their properties and to carry on their business as now
being conducted in all material respects. As of the date
hereof, neither Crestar nor Crestar Bank MD directly
or indirectly own, or have any rights to acquire, any shares
of AB Common Stock, other than pursuant to the Option
Agreement.
(i) Tax Matters. Each of Crestar, Crestar Bank MD,
and all other corporations that are members of the same
"affiliated group," as defined in Section 1504(a)(1) of
the Code, as Crestar (collectively, the "Crestar Group")
has filed or caused to be filed or (in the case of
returns or reports not yet due) will file all tax returns
and reports required to have been filed by or for
it before the Effective Time of the Holding Company Merger.
Each member of the Crestar Group has paid or made
adequate provision for or (with respect to returns or
reports not yet filed) before the Effective Time of the
Holding Company Merger will pay or make adequate
provision in all material respects for all taxes,
additions to tax, penalties, and interest for all periods
covered by those returns or reports. The consolidated
balance sheets contained in the Crestar Financial
Statements fully and properly reflect, as of the dates
thereof, the aggregate liabilities of the members of
the Crestar Group for all accrued taxes, additions to tax,
penalties and interest in all material respects. For
periods ending after September 30, 1993, the books and
records of each member of the Crestar Group fully and
properly reflect its liability for all accrued taxes,
additions to tax, penalties and interest. Except as
disclosed in Schedule L, no member of the Crestar Group
has granted (nor is it subject to) any waiver of the
period of limitations for the assessment of tax for any
currently open taxable period, and no unpaid tax
deficiency has been asserted against or with respect to
any member of the Crestar Group by any taxing authority.
(j) Property. Crestar and Crestar Bank MD own (or
enjoy use of under capital leases) all property reflected
on the Crestar balance sheet as of September 30, 1993 as
being owned by them (except property sold or otherwise
disposed of in the ordinary course of business). All
property shown as being owned is owned free and clear of
mortgages, liens, pledges, charges or encumbrances of any
nature whatsoever, except those referred to in such
Crestar balance sheet or the notes thereto, liens
for current taxes not yet due and payable, any unfiled
mechanic's liens and such encumbrances and imperfections
of title, if any, as are not substantial in character or
amount or otherwise materially impair Crestar's
consolidated business operations. The leases relating to
leased property are fairly reflected in such Crestar
balance sheet.
I-24
All property and assets material to the business or
operations of Crestar and Crestar Bank MD are in
substantially good operating condition and repair and
such property and assets are adequate for the business
and operations of Crestar and Crestar Bank MD as
currently conducted.
(k) Agreements in Force and Effect. All material
contracts, agreements, plans, leases, policies and
licenses of Crestar and Crestar Bank MD are valid and in
full force and effect; and Crestar and Crestar Bank MD
have not breached any material provision of, nor are in
default in any material respect under the terms of, any
such contract, agreement, lease, policy or license, the
effect of which breach or default would have a material
adverse effect upon the financial condition, results of
operations, business or prospects of Crestar on a
consolidated basis.
(l) Legal Proceedings; Compliance with Laws. There
is no legal, administrative, arbitration or other
proceeding or governmental investigation pending
(including any legal, administrative, arbitration or
other proceeding involving a violation of the federal
antitrust laws), or, to the knowledge of Crestar's and
Crestar Bank MD's management, threatened or probable of
assertion which, if decided adversely, would have a
material adverse effect on the financial condition,
results of operations, business or prospects of Crestar
on a consolidated basis. Crestar and Crestar Bank MD
have complied with any laws, ordinances, requirements,
regulations or orders applicable to their respective
businesses, except where noncompliance would not have a
material adverse effect on the financial condition,
results of operations, business or prospects of Crestar
on a consolidated basis. Crestar and Crestar Bank MD
have all licenses, permits, orders or approvals of any
federal, state, local or foreign governmental or
regulatory body that are necessary for the conduct of the
respective businesses of Crestar and Crestar Bank MD and
the absence of which would have a material adverse effect
on the financial condition, results of operations,
business or prospects of Crestar on a consolidated basis;
the Permits are in full force and effect; neither Crestar
nor Crestar Bank MD is aware of any material violations
that are or have been recorded in respect of any Permit
nor has Crestar or Crestar Bank MD received notice of any
violations; and no proceeding is pending or, to the
knowledge of Crestar or Crestar Bank MD, threatened to
revoke or limit any Permit. Neither Crestar nor Crestar
Bank MD is subject to any judgment, order,
writ, injunction or decree which materially adversely affects,
or might reasonably be expected to materially adversely
affect, the financial condition, results of operations,
business or prospects of Crestar on a consolidated basis.
(m) Employee Benefit Plans.
I-25
(1) Neither Crestar nor any of its subsidiaries,
nor any employee benefit pension plan (as defined in
Section 3(2) of ERISA (a "Pension Plan")) maintained
by it, has incurred any material liability to the
PBGC or to the Internal Revenue Service with respect
to any Pension Plan, deferred compensation,
consultant, severance, thrift, option, bonus and
group insurance contract or any other incentive,
welfare and employee benefit plan and agreement
presently in effect, or approved prior to the date
hereof, for the benefit of employees or former
employees of Crestar and its subsidiaries or the
dependents or beneficiaries of any employee or former
employee of Crestar or any subsidiary (the "Crestar
Employee Plans"). There is not currently pending with
the PBGC any filing with respect to any reportable
event under Section 4043 of ERISA nor has any
reportable event occurred as to which a filing is
required and has not been made.
(2) Full payment has been made (or proper
accruals have been established) of all contributions
which are required for periods prior to the Closing
Date under the terms of each Crestar Employee Plan,
ERISA, or a collective bargaining agreement, and no
accumulated funding deficiency (as defined in Section
302 of ERISA or Section 412 of the Code) whether or
not waived, exists with respect to any Pension Plan.
(3) No Crestar Employee Plan is a "multiemployer
plan" (as defined in Section 3(37) of ERISA).
Neither Crestar nor Crestar Bank MD has incurred any
material liability under Section 4201 of ERISA for a
complete or partial withdrawal from a multiemployer
plan (as defined in Section 3(37) of ERISA). Neither
Crestar nor Crestar Bank MD has participated in or
agreed to participate in, a multiemployer plan (as
defined in Section 3(37) of ERISA).
(4) All "employee benefit plans," as defined
in Section 3(3) of ERISA, that are maintained by Crestar
comply and have been administered in compliance in
all material respects with ERISA and all other
applicable legal requirements, including the terms of
such plans, collective bargaining agreements and
securities laws. Neither Crestar nor Crestar Bank MD
has any material liability under any such plan that
is not reflected in the Crestar Financial Statements.
(5) No prohibited transaction has occurred with
respect to any "employee benefit plan" (as defined
in Section 3(3) of ERISA) maintained by Crestar or
Crestar Bank MD that would result, directly or
indirectly, in material liability under ERISA or in
the imposition of a material excise tax under Section
4975 of the Code.
(n) Loan Portfolio. Crestar has no loans
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outstanding other than intercompany loans. Each loan
outstanding on the books of Crestar Bank, Crestar Bank
N.A., and Crestar Bank MD (the "Banks") is reflected
correctly in all respects by the loan documentation, was
made in the ordinary course of business, was not known to
be uncollectible at the time it was made, and was made in
accordance with the Banks' standard loan policies.
The records of the Banks regarding all loans outstanding on
its books are accurate in all material respects. The
reserves for possible loan losses on the outstanding
loans of the Banks and the reserves for other real estate
owned by Crestar as reflected in the Crestar Financial
Statements, have been established in accordance with
generally accepted accounting principles and with the
requirements of the Federal Reserve Board, and in the
best judgment of the management of the Banks, are
adequate to absorb all material known and anticipated
loan losses in the loan portfolios of the Banks, and any
losses associated with other real estate owned or held by
the Banks.
(o) Disclosure. Except to the extent of any
subsequent correction or supplement with respect thereto
furnished prior to the date hereof, no written statement,
certificate, schedule, list or other written information
furnished by or on behalf of Crestar at any time to AB,
in connection with this Agreement when considered as a
whole, contains or will contain any untrue statement of a
material fact or omits or will omit to state a material
fact necessary in order to make the statements herein or
therein, in light of the circumstances under which they
were made, not misleading. Each document delivered or to
be delivered by Crestar to AB is or will be a true and
complete copy of such document, unmodified except by
another document delivered by Crestar.
ARTICLE IV
Conduct and Transactions Prior to
Effective Time of the Merger
4.1. Access to Records and Properties of Crestar,
Crestar Bank MD, AB and Annapolis, Confidentiality. Between the
date of this Agreement and the Effective Time of the Merger, each
of Crestar and Crestar Bank MD on the one hand, and each of AB
and Annapolis on the other, agree to give to the other reasonable
access to all the premises and books and records (including tax
returns filed and those in preparation) of it and its
subsidiaries and to cause its officers to furnish the other with
such financial and operating data and other information with
respect to the business and properties as the other shall from
time to time request for the purposes of verifying the warranties
and representations set forth herein, preparing the Registration
Statement (as defined in Section 4.2) and applicable regulatory
filings (as set forth in Section 4.6), and preparing consolidated
financial statements of AB as of a date prior to the Effective
Time of the Merger in order to facilitate Crestar in performance
of its post-Closing Date financial reporting requirements and
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audit as permitted in Section 4.8 hereof; provided, however, that
any such investigation shall be conducted in such manner as not
to interfere unreasonably with the operation of the respective
business of the other. Crestar and AB shall each maintain the
confidentiality of all confidential information furnished to it
by the other party hereto concerning the business, operations,
and financial condition of the party furnishing such information,
and shall not use any such information except in furtherance of
the Transaction. If this Agreement is terminated, each party
hereto shall promptly return all documents and copies of, and all
workpapers containing, confidential information received from the
other party hereto. The obligations of confidentiality under
this Section 4.1 shall survive any such termination of this
Agreement and shall remain in effect, except to the extent that
(a) one party shall have directly or indirectly acquired the
assets and business of the other party; (b) as to any particular
confidential information with respect to one party, such
information (i) shall become generally available to the public
other than as a result of an unauthorized disclosure by the other
party or (ii) was available to the other party on a
nonconfidential basis prior to its disclosure by the first party;
or (c) disclosure by any party is required by subpoena or order
of a court of competent jurisdiction or by order of a regulatory
authority of competent jurisdiction.
4.2. Registration Statement, Proxy Statement,
Shareholder Approval. AB will duly call and will hold a meeting
of its shareholders as soon as practicable for the purpose of
approving the Holding Company Merger and will comply fully with
the provisions of the Delaware General Corporation Law, the 1933
Act and the 1934 Act and the rules and regulations of the SEC
under such acts to the extent applicable, and the Articles of
Incorporation and By-laws of AB relating to the call and holding
of a meeting of shareholders for such purpose. Subject to action
taken by its Board of Directors pursuant to or as a result of the
exception clause to the first sentence of Section 4.4 hereof, the
Board of Directors of AB will recommend to and actively encourage
shareholders that they vote in favor of the Holding Company
Merger. Crestar and AB will jointly prepare the proxy statement-
prospectus to be used in connection with such meeting (the
"Proxy Statement-Prospectus") and Crestar will prepare and file with the
SEC a Registration Statement on Form S-4 (the "Registration
Statement"), of which such Proxy Statement-Prospectus shall be a
part, and use its best efforts promptly to have the Registration
Statement declared effective. In connection with the foregoing,
Crestar will comply with the requirements of the 1933 Act, the
1934 Act, the New York Stock Exchange and the rules and
regulations of the SEC under such acts with respect to the
offering and sale of Crestar Common Stock in connection with the
Transaction and with all applicable state Blue Sky and securities
laws. The notices of such meetings and the Proxy Statement-
Prospectus shall not be mailed to AB shareholders until the
Registration Statement shall have become effective under the 1933
Act. AB covenants that none of the information supplied by AB
and Crestar covenants that none of the information supplied by
Crestar in the Proxy Statement-Prospectus will, at the time of
the mailing of the Proxy Statement-Prospectus to AB shareholders,
contain any untrue statement of a material fact nor will any such
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information omit any material fact required to be stated therein
or necessary in order to make the statements therein, in light of
the circumstances in which they were made, not misleading; and at
all times subsequent to the time of the mailing of the Proxy
Statement-Prospectus, up to and including the date of the meeting
of AB shareholders to which the Proxy Statement-Prospectus
relates, none of such information in the Proxy Statement-
Prospectus, as amended or supplemented, will contain an untrue
statement of a material fact or omit any material fact required
to be stated therein in order to make the statements therein, in
light of the circumstances in which they were made, not
misleading.
AB, as the sole shareholder of Annapolis, and Crestar, as
the sole shareholder of Crestar Bank MD, each hereby approve this
Agreement and the Bank Plan of Merger. In addition Crestar
approves the formation of the Interim Thrift and the Conversion.
4.3. Operation of the Business of AB and Annapolis.
AB and Annapolis agree that from June 30, 1993 to the Effective
Time of the Merger, they have operated, and they will operate,
their respective businesses substantially as presently operated
and only in the ordinary course and in general conformity with
applicable laws and regulations, and, consistent with such
operation, they will use their best efforts to preserve intact
their present business organizations and their relationships with
persons having business dealings with them. Without limiting the
generality of the foregoing, AB and Annapolis agree that they
will not, without the prior written consent of Crestar, (i) make
any change in the salaries, bonuses or title of any officer named
on Annex II, III, IV, V, VI; (ii) make any change in the title,
salaries or bonuses of any other employee, other than those
permitted by current employment policies in the ordinary course
of business, any of which changes shall be reported promptly to
Crestar; (iii) except as set forth in Schedule M enter into any
bonus, incentive compensation, deferred compensation, profit
sharing, thrift, retirement, pension, group insurance or other
benefit plan or any employment or consulting agreement or
increase benefits under existing plans; (iv) create or otherwise
become liable with respect to any indebtedness for money borrowed
or purchase money indebtedness except in the ordinary course of
business; (v) amend their Articles of Incorporation, Charter, or
By-laws; (vi) issue or contract to issue any shares of AB capital
stock or securities exchangeable for or convertible into capital
stock, except (x) up to 5,000 shares of AB Common Stock to be
issued pursuant to the exercise of employee stock options
outstanding as of June 30, 1993, and (y) pursuant to the Option
Agreement; (vii) purchase any shares of AB capital stock;
(viii) enter into or assume any material contract or obligation,
except in the ordinary course of business; (ix) waive any right
of substantial value; (x) propose or take any other action which
would make any representation or warranty in Section 3.1 hereof
untrue; (xi) introduce any new products or services or change the
rate of interest on any deposit instrument to above-market
interest rates; (xii) make any change in policies respecting
extensions of credit or loan charge-offs; (xiii) change reserve
requirement policies; (xiv) change securities portfolio policies;
(xv) enter into any new agreement, amendment or endorsement or
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make any changes relating to insurance coverage, including
coverage for its directors and officers, which would result in an
additional payment obligation of $50,000 or more; or (xvi)
propose or take any action with respect to the closing of any
branches. AB and Annapolis further agree that, between the date
of this Agreement and the Effective Time of the Merger, they will
consult and cooperate with Crestar and Crestar Bank MD regarding
(i) loan portfolio management, including management and work-out
of nonperforming assets, and credit review and approval
procedures, including notice to Crestar's Credit Review
Management Department of any new nonresidential loans in excess
of $500,000, and (ii) securities portfolio and funds management,
including management of interest rate risk.
4.4. No Solicitation. Unless and until this Agreement
shall have been terminated pursuant to its terms, neither AB,
Annapolis nor any of their executive officers, directors,
representatives, agents or affiliates shall, directly
or indirectly, encourage, solicit or initiate discussions or
negotiations (with any person other than Crestar) concerning any
merger, sale of substantial assets, tender offer, sale of shares
of stock or similar transaction involving AB or Annapolis or
disclose, directly or indirectly, any information not customarily
disclosed to the public concerning AB or Annapolis, afford to any
other person access to the properties, books or records of AB or
Annapolis or otherwise assist any person preparing to make or who
has made such an offer, or enter into any agreement with any
third party providing for a business combination transaction,
equity investment or sale of significant amount of assets, except
in a situation in which a majority of the full Board of Directors
of AB has determined in good faith, upon advice of counsel, that
such Board has a fiduciary duty to consider and respond to a bona
fide proposal by a third party (which proposal was not directly
or indirectly solicited by AB or Annapolis or any of their
respective officers, directors, representatives, agents or
affiliates) and provides written notice of its intention to
consider such proposal and the material terms thereof to Crestar
at least five days before responding to the proposal. AB and
Annapolis will promptly communicate to Crestar the terms of any
proposal which it may receive in respect to any of the
foregoing transactions.
4.5. Dividends. AB agrees that since June 30, 1993 it
has not, and prior to the Effective Time of the Holding Company
Merger it will not, declare any cash dividends without the prior
written consent of Crestar.
4.6. Regulatory Filings; Best Efforts. Crestar and AB
shall jointly prepare all regulatory filings required to
consummate the transactions contemplated by the Agreement and the
Plans and submit the filings for approval with the
Federal Reserve Board, the OTS, the FDIC and the Maryland Banking
Division as soon as practicable after the date hereof. Crestar
and AB shall use their best efforts to obtain approvals of such
filings. Subject to action taken by the Board of Directors of AB
pursuant to or as a result of the exception clause to the first
sentence of Section 4.4 hereof, each of Crestar, Crestar Bank MD,
AB and Annapolis shall use its best efforts in good faith, and
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each of them shall cause its subsidiaries to use their best
efforts in good faith, to take all such action as may be
necessary or appropriate in order to effect the Transaction.
4.7. Public Announcements. Each party will consult
with the other before issuing any press release or otherwise
making any public statements with respect to the Transaction and
shall not issue any press release or make any such public
statement prior to such consultations and approval of the other
party, which approval shall not be unreasonably withheld, except
as may be required by law.
4.8. Operating Synergies; Conformance to Reserve
Policies, Etc. Between the date hereof and the Effective Time of
the Holding Company Merger, AB and Annapolis management will work
with Crestar to achieve appropriate operating efficiencies
following the Closing Date. Customer notification and direct
contact with customers will commence 30 days prior to the Closing
Date. At the request of Crestar and upon receipt by AB and
Annapolis of written confirmation from Crestar and Crestar Bank
MD that there are no conditions to the obligations of Crestar and
Crestar Bank MD under this Agreement set forth in Article V which
they believe will not be fulfilled so as to permit them to
consummate the Transaction and the other transactions
contemplated hereby, on the day prior to the Effective Time of
the Merger AB shall establish such additional accruals, reserves
and charge-offs, through appropriate entries in its accounting
books and records, as may be necessary to conform AB's accounting
and credit loss reserve practices and methods to those of Crestar
(as such practices and methods are to be applied from and after
the Effective Time of the Merger) and to Crestar's plans with
respect to the conduct of the business of AB and Annapolis
following the Transaction, as well as for the anticipated
recapture of the bad debt reserves established by Annapolis for
federal income tax purposes (and state income tax purposes, if
applicable) prior thereto and the costs and expenses relating to
the consummation by AB and Annapolis of the Transaction and the
other transactions contemplated hereby. Any such accruals,
reserves and charge-offs shall not be deemed to cause any
representation and warranty of AB and Annapolis to not be true
and accurate as of the Effective Time of the Merger. Subject to
the requirements set forth in the immediately preceding sentence,
prior to the Effective Time of the Merger AB also shall adopt
Financial Accounting Standards Board ("FASB") Statement No. 106
by immediately recognizing the cumulative impact of such
accounting statement.
4.9. Transactions in Crestar Common Stock. Other than
the issuance of Crestar Common Stock upon the exercise of stock
options granted pursuant to employee benefit plans of Crestar,
none of Crestar, Crestar Bank MD, AB or Annapolis will purchase,
sell or otherwise acquire or dispose of any shares of Crestar
Common Stock during the 20 trading days ending on the third day
prior to the Closing Date.
4.10. Crestar Rights Agreement. Crestar agrees that
any rights issued pursuant to the Rights Agreement adopted by it
in 1989 shall be issued with respect to each share of Crestar
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Common Stock issued pursuant to the terms hereof and the Holding
Company Plan of Merger, regardless whether there has occurred a
Distribution Date under the terms of such Rights Agreement prior
to the occurrence of the Effective Time of the Holding Company
Merger.
4.11. NYSE Listing. Crestar will file with the New
York Stock Exchange a Supplemental Listing Application for the
shares of Crestar Common Stock to be issued in the Holding
Company Merger and use its best efforts to have such shares
approved for listing on the New York Stock Exchange prior to the
Effective Time of the Merger.
4.12. Agreement as to Efforts to Consummate. Subject
to the terms and conditions of this Agreement, each of Crestar
and AB agrees to use all reasonable efforts to take, or cause to
be taken, all actions, and to do, or cause to be done, all things
necessary, proper or advisable under applicable laws
and regulations to consummate and make effective, as soon as
practicable after the date of this Agreement, the transactions
contemplated by this Agreement, including, without limitation,
using reasonable effort to lift or rescind any injunction or
restraining order or other order adversely affecting the ability
of the parties to consummate the transactions contemplated
herein. Each of Crestar and AB shall use its best efforts to
obtain consents of all third parties and governmental bodies
necessary or desirable for the consummation of the transactions
contemplated by this Agreement.
4.13. Adverse Changes in Condition. Crestar and AB
each agrees to give written notice promptly to the other
concerning any material adverse change in its consolidated
condition (financial or other) from the date of this Agreement
until the Effective Time of the Merger that might adversely
affect the consummation of the transactions contemplated hereby
or upon becoming aware of the occurrence or impending occurrence
of any event or circumstance which would cause or constitute a
material breach of any of the representations, warranties or
covenants of such party contained herein. Each of Crestar and AB
shall use its best efforts to prevent or promptly to remedy the
same.
4.14. Updating of Schedules. From the date of
execution of this Agreement until the consummation of the
Transaction, AB and Crestar agree to keep up to date all of the
Schedules hereto and to provide notification to the other of any
changes or additions or events which have caused, or after the
lapse of time may cause, any such change or addition in any of
the Schedules hereto.
ARTICLE V
Conditions of Transaction
5.1. Conditions of Obligations of Crestar and Crestar
Bank MD. The obligations of Crestar and Crestar Bank MD to
perform this Agreement are subject to the satisfaction at or
prior to the Effective Time of the Merger of the following
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conditions unless waived by Crestar and Crestar Bank MD.
(a) Representations and Warranties; Performance of
Obligations; No Adverse Change. The representations and
warranties of AB and Annapolis set forth in Section 3.l
hereof shall be true and correct in all material respects
as of the date of this Agreement and as of the Effective
Time of the Merger as though made on and as of the
Effective Time of the Merger (or on the date when made in
the case of any representation and warranty which
specifically relates to an earlier date); AB and
Annapolis shall have performed in all material respects
all obligations required to be performed by them under
this Agreement prior to the Effective Time of the Merger;
there shall have occurred no material adverse change in
the consolidated condition (financial or otherwise) of AB
from June 30, 1993 to the Effective Time of the Merger
(exclusive of actions taken by AB at Crestar's
request pursuant to Section 4.8 hereof); and Crestar and Crestar
Bank MD shall have received a certificate signed by the
Chief Executive Officer and by the Chief Financial
Officer of AB and Annapolis, which may be to their best
knowledge after due inquiry, to such effects.
(b) Authorization of Transaction. All action
necessary to authorize the execution, delivery and
performance of this Agreement by AB and Annapolis and the
consummation of the transactions contemplated herein
(including the shareholder actions referred to in Section
4.2) shall have been duly and validly taken by the Boards
of Directors of AB and Annapolis and by the shareholders
of AB and Annapolis and AB and Annapolis shall have full
power and right to merge on the terms provided herein.
(c) Opinion of Counsel. Crestar and Crestar Bank MD
shall have received an opinion of Manatt, Phelps &
Phillips, counsel to AB and Annapolis, dated the Closing
Date and satisfactory in form and substance to counsel to
Crestar and Crestar Bank MD, in the form attached hereto
as Exhibit E.
(d) The Registration Statement. The Registration
Statement shall be effective under the 1933 Act and
Crestar shall have received all state securities laws or
"blue sky" permits and other authorizations or there
shall be exemptions from registration requirements
necessary to offer and issue the Crestar Common Stock in
connection with the Holding Company Merger, and neither
the Registration Statement nor any such permit,
authorization or exemption shall be subject to a stop
order or threatened stop order by the SEC or any
state securities authority.
(e) Tax Opinion. Crestar and Crestar Bank MD shall
have received, in form and substance satisfactory to
them, an opinion of Hunton & Williams to the effect that,
for federal income tax purposes, each of the Holding
Company Merger and the Bank Merger will qualify as a
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"reorganization" under Section 368(a) of the Code, and no
taxable gain will be recognized by Crestar, Crestar Bank
MD, AB or Annapolis (i) in the Holding Company Merger,
(a) upon the transfer of AB's assets to Crestar in
exchange for Crestar Common Stock, cash and the
assumption of AB's liabilities or (b) upon the
distribution of such Crestar Common Stock and cash to
AB shareholders, or (ii) in the Bank Merger, (a) upon the
transfer of Annapolis's assets to Crestar Bank MD in
exchange for the assumption of Annapolis's liabilities
and in constructive exchange for Crestar Bank MD common
stock (however, Annapolis or Crestar Bank MD may be
required to include in income certain amounts as a result
of the termination of Annapolis's bad-debt reserve
maintained for federal income tax purposes and other
possible required changes in accounting methods) or (b)
upon the constructive distribution of such Crestar Bank
MD common stock to Crestar.
(f) Regulatory Approvals. All required approvals
from federal and state regulatory authorities having
jurisdiction to permit Crestar and Crestar Bank MD to
consummate the Transaction and to issue Crestar Common
Stock to AB shareholders shall have been received and
shall have contained no conditions deemed in good faith
to be materially disadvantageous by Crestar, including
such approval necessary to consummate the Bank Merger in
an "Oakar" transaction.
(g) Affiliate Letters. Each shareholder of AB who
is a AB Affiliate shall have executed and delivered a
commitment and undertaking to the effect that (1) such
shareholder will dispose of the shares of Crestar Stock
received by him in connection with the Holding Company
Merger only in accordance with the provisions of
paragraph (d) of Rule 145; (2) such shareholder will not
dispose of any of such shares until Crestar has received
an opinion of counsel acceptable to it that such proposed
disposition is in compliance with the provisions of
paragraph (d) of Rule 145, which opinion shall
be rendered promptly following counsel's receipt of such
shareholder's written notice of its intention to sell
shares of Crestar Common Stock; and (3) the certificates
representing said shares may bear a legend referring to
the foregoing restrictions.
(h) Acceptance by Crestar and Crestar Bank MD
Counsel. The form and substance of all legal matters
contemplated hereby and of all papers delivered hereunder
shall be reasonably acceptable to counsel for Crestar and
Crestar Bank MD.
(i) Consent of First National Bank of Maryland or
Payment in Full of FNBM Loan. (i) Crestar shall have
received a copy of the written consent of First National
Bank of Maryland within 30 days before the Closing Date
for the parties to consummate the transactions
contemplated hereby, or (ii) the FNBM Loan shall have
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been paid in full, on or before the Closing Date or June
30, 1994, whichever date shall first occur, as described
in Section 8.1 hereof and the AB Loan Agreement shall
have been terminated.
5.2. Conditions of Obligations of AB and Annapolis.
The obligations of AB and Annapolis to perform this Agreement
are subject to the satisfaction at or prior to the Effective Time of
the Merger of the following conditions unless waived by AB and
Annapolis:
(a) Representations and Warranties; Performance of
Obligations. The representations and warranties of
Crestar and Crestar Bank MD set forth in Section 3.2
hereof shall be true and correct in all material respects
as of the date of this Agreement and as of the Effective
Time of the Merger as though made on and as of the
Effective Time of the Merger (or on the date when made in
the case of any representation and warranty which
specifically relates to an earlier date); Crestar and
Crestar Bank MD shall have performed in all material
respects all obligations required to be performed by them
under this Agreement prior to the Effective Time of the
Merger; and AB and Annapolis shall have received a
certificate signed by the Chief Executive Officer and by
the Chief Financial Officer of Crestar and Crestar Bank
MD, which may be to their best knowledge after due
inquiry, to such effects.
(b) Authorization of Transaction. All action
necessary to authorize the execution, delivery and
performance of this Agreement by Crestar and Crestar Bank
MD and the consummation of the transactions contemplated
hereby shall have been duly and validly taken by the
Boards of Directors of Crestar and Crestar Bank MD and
the shareholders of AB and Crestar and Crestar Bank MD
and AB shall have full power and right to merge on the
terms provided herein.
(c) Opinion of Counsel. AB and Annapolis shall
have received an opinion of Hunton & Williams, counsel to
Crestar and Crestar Bank MD, dated the Closing Date and
satisfactory in form and substance to counsel to AB and
Annapolis, to the effect that:
(1) Crestar is a corporation organized and in
good standing under the laws of Virginia and has all
requisite corporate power to own, lease and operate
its properties and to carry on its business as now
being conducted as described in the Registration
Statement and Proxy Statement-Prospectus;
(2) Crestar Bank MD is a banking corporation
organized and in good standing under the laws of
Maryland and has all requisite corporate power to
own, lease and operate its properties and to carry on
its business as now being conducted as described in
the Registration Statement and Proxy Statement-
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Prospectus;
(3) Crestar and Crestar Bank MD have full
corporate power to carry out the transactions
provided for in the Agreement; all corporate and
other proceedings required to be taken by or on the
part of Crestar and Crestar Bank MD to authorize them
to execute and deliver the Agreement and to
consummate the transactions contemplated thereby and
by the Plans have been duly and validly taken; the
Agreement has been duly and validly authorized,
executed and delivered by Crestar and Crestar Bank MD
and constitutes a valid and binding obligation of
Crestar and Crestar Bank MD enforceable in accordance
with its terms except as the same (i) may be limited
by bankruptcy, insolvency, reorganization or other
similar laws relating to the rights of creditors and
(ii) is subject to general principles of
equity (regardless of whether such enforceability is
considered in a proceeding in equity or law); the
Plans have been adopted by the Boards of Directors of
Crestar and Crestar Bank MD, respectively and by
Crestar in its capacity as the sole shareholder of
Crestar Bank MD; and the shares of Crestar Common
Stock to be issued in the Holding Company Merger in
exchange for all of the outstanding shares of AB
Common Stock have been duly authorized and when so
issued will be validly issued, fully paid and
nonassessable;
(4) All outstanding shares of Crestar Common
Stock have been duly authorized and are validly
issued, fully paid and nonassessable;
(5) Execution and delivery by Crestar and
Crestar Bank MD of the Agreement, consummation by
Crestar and Crestar Bank MD of the transactions
contemplated thereby, and compliance by Crestar and
Crestar Bank MD with the provisions thereof will not
conflict with or result in a breach of any provisions
of either Crestar's or Crestar Bank MD's Articles of
Incorporation, Charter or By-laws or a default (or
give rise to rights of termination, cancellation or
acceleration) under any of the terms, conditions or
provisions of any note, bond, mortgage, indenture,
license, agreement or any other instrument or
obligation of Crestar or Crestar Bank MD known to
such counsel, or violate any court order, writ,
injunction or decree applicable to Crestar or Crestar
Bank MD or any of their respective properties or
assets, of which such counsel has knowledge;
(6) Shares of Crestar Common Stock to be issued
pursuant to the Agreement have been duly registered
under the 1933 Act;
(7) Such counsel does not know of any litigation
that is pending or threatened which might result in a
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permanent injunction against Crestar or Crestar Bank
MD or which, individually or in the aggregate,
otherwise might have a material adverse effect on
Crestar or Crestar Bank MD or the transactions
contemplated by this Agreement;
(8) All legal matters pertaining to consummation
of the Transaction under the laws of Virginia,
Maryland and the United States, including the receipt
of all regulatory approvals, other than the filing of
the Articles of Merger, have been completed to the
satisfaction of such counsel in all material
respects; and
(9) On the basis of facts within their
knowledge, such counsel have no reason to believe
that (except as to financial statements and other
financial data, or as to material relating to,
and supplied by, AB or Annapolis for inclusion in the
Proxy Statement-Prospectus, as to which no belief
need be expressed) the Proxy Statement-Prospectus (as
amended or supplemented, if so amended or
supplemented) contained any untrue statement of a
material fact or omitted any material fact required
to be stated therein or necessary in order to make
the statements therein, in light of the circumstances
under which they were made, not misleading as of (i)
the time the Registration Statement became effective
and (ii) the time of the special meeting
of shareholders of AB mentioned in Section 4.2 of the
Agreement.
(d) The Registration Statement. The Registration
Statement shall be effective under the 1933 Act and
Crestar shall have received all state securities laws or
"blue sky" permits and other authorizations or there
shall be exemptions from registration requirements
necessary to offer and issue the Crestar Common Stock in
connection with the Holding Company Merger, and neither
the Registration Statement nor any such
permit, authorization or exemption shall be subject to a stop
order or threatened stop order by the SEC or any state
securities authority.
(e) Regulatory Approvals. All required approvals
from federal and state regulatory authorities having
jurisdiction to permit AB and Annapolis to consummate the
Transaction and to permit Crestar to issue Crestar Common
Stock to AB shareholders shall have been received.
(f) Tax Opinion. Crestar, Crestar Bank MD, AB
and Annapolis shall have received, in form and substance
reasonably satisfactory to them, an opinion of Hunton &
Williams to the effect that, for federal income tax
purposes, each of the Holding Company Merger and the Bank
Merger will qualify as a "reorganization" under Section
368(a) of the Code; no taxable gain will be recognized by
Crestar, Crestar Bank MD, AB or Annapolis (i) in the
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Holding Company Merger, (a) upon the transfer of AB's
assets to Crestar in exchange for Crestar Common Stock,
cash and the assumption of AB's liabilities or (b) upon
the distribution of such Crestar Common Stock and cash to
AB shareholders, or (ii) in the Bank Merger, (a) upon the
transfer of Annapolis's assets to Crestar Bank MD in
exchange for the assumption of Annapolis's liabilities
and in constructive exchange for Crestar Bank MD common
stock (however, Annapolis or Crestar Bank MD may be
required to include in income certain amounts as a result
of the termination of Annapolis's bad-debt reserve
maintained for federal income tax purposes and other
possible required changes in accounting methods) or (b)
upon the constructive distribution of such Crestar Bank
MD common stock to Crestar; no taxable gain will be
recognized by an AB shareholder on the exchange by such
shareholder of shares of AB Common Stock solely for
shares of Crestar Common Stock (including any fractional
share interest) in the Holding Company Merger; an AB
shareholder who receives cash and shares of Crestar
Common Stock for shares of AB Common Stock in the Holding
Company Merger pursuant to the cash election will
recognize any gain realized (including any gain treated
as a dividend) up to the amount of cash received
(excluding cash in lieu of a fractional share of Crestar
Common Stock), but will not recognize any loss; an AB
shareholder's basis in Crestar Common Stock (including
any fractional share interest) received in the Holding
Company Merger will be the same as the shareholder's
basis in the AB Common Stock surrendered in exchange
therefor, decreased by the amount of any cash received
(excluding cash in lieu of a fractional share of Crestar
Common Stock) and increased by the amount of any gain
recognized (including any gain treated as a dividend) by
the shareholder; the holding period of such Crestar
Common Stock (including any fractional share interest)
for an AB shareholder will include the holding period of
the AB Common Stock surrendered in exchange therefor, if
such AB Common Stock is held as a capital asset by the
shareholder at the Effective Time of the Holding
Company Merger; and an AB shareholder who receives cash in lieu
of a fractional share of Crestar Common Stock will
recognize gain or loss equal to any difference between
the amount of cash received and the shareholder's basis
in the fractional share interest.
(g) Fairness Opinion. AB shall have received an
opinion from Kaplan Associates, Inc. that the
consideration to be paid to shareholders of AB pursuant
to Section 2.1 of this Agreement is fair from a financial
point of view to the shareholders of AB.
(h) NYSE Listing. The shares of Crestar Common
Stock to be issued in the Holding Company Merger shall
have been approved for listing, upon notice of issuance,
on the New York Stock Exchange.
(i) Acceptance by AB and Annapolis Counsel. The
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form and substance of all legal matters contemplated
hereby and of all papers delivered hereunder shall be
acceptable to counsel for AB and Annapolis.
(j) Consent of First National Bank of Maryland or
Payment in Full of FNBM Loan. (i) AB shall have received
the written consent of First National Bank of
Maryland within 30 days before the Closing Date for the parties to
consummate the transactions contemplated hereby, or (ii)
the FNBM Loan shall have been paid in full, on or before
the Closing Date or June 30, 1994, whichever date shall
first occur, as described in Section 8.1 hereof and the
AB Loan Agreement shall have been terminated.
ARTICLE VI
Closing Date; Effective Time
6.1. Closing Date. Unless another date or place is
agreed to in writing by the parties, the closing of the
transactions contemplated in this Agreement shall take place at
the offices of Crestar, 919 East Main Street, Richmond, Virginia,
at 10:00 o'clock A.M., local time, on such date as Crestar shall
designate to AB at least 10 days prior to the designated Closing
Date and as reasonably acceptable to AB; provided, that the date
so designated shall not be earlier than (a) 30 days after Federal
Reserve approval or (b) May 19, 1994 (the "Closing Date").
6.2. Filings at Closing. Subject to the provisions
of Article V, at the Closing Date, Crestar shall cause Articles of
Merger relating to the Holding Company Plan of Merger to be filed
in accordance with the Virginia Stock Corporation Act and the
Delaware General Corporation Law and Articles of Merger relating
to the Bank Plan of Merger to be filed in accordance with the
Maryland Corporate Code and the rules and regulations of the OTS
and the Maryland Banking Division, and each of Crestar and AB
shall take any and all lawful actions to cause the Holding
Company Merger and Bank Merger to become effective.
6.3. Effective Time. Subject to the terms
and conditions set forth herein, including receipt of all required
regulatory approvals, the Holding Company Merger shall become
effective at the time Articles of Merger filed with the Virginia
State Corporation Commission are made effective (the "Effective
Time of the Holding Company Merger") and the Bank Merger shall
become effective at the time Articles of Merger filed with the
Maryland State Department of Assessments and Taxation are made
effective. The Effective Time of the Holding Company Merger and
the Effective Time of the Bank Merger are referred to herein
collectively as the "Effective Time of the Merger".
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ARTICLE VII
Termination; Survival of Representations,
Warranties and Covenants; Waiver and Amendment
7.1. Termination. This Agreement shall be terminated,
and the Transaction abandoned, if the shareholders of AB shall
not have given the approval required by Section 4.2. Notwith-
standing such approval by such shareholders, this Agreement may
be terminated at any time prior to the Effective Time of the
Holding Company Merger, by:
(a) The mutual consent of Crestar, Crestar Bank MD,
AB and Annapolis, as expressed by their respective Boards
of Directors;
(b) Either Crestar or Crestar Bank MD on the one
hand or AB or Annapolis on the other hand, as expressed
by their respective Boards of Directors, after September
30, 1994;
(c) By Crestar and Crestar Bank MD in writing
authorized by its respective Board of Directors if AB or
Annapolis has, or by AB and Annapolis in writing
authorized by its respective Board of Directors if
Crestar or Crestar Bank MD has, in any material respect,
breached (i) any covenant or agreement contained herein,
or (ii) any representation or warranty contained herein,
in any case if such breach has not been cured by the
earlier of 30 days after the date on which written notice
of such breach is given to the party committing such
breach or the Closing Date; provided that it is
understood and agreed that either party may terminate
this Agreement on the basis of any such material breach
of any representation or warranty contained herein
notwithstanding any qualification therein relating to the
knowledge of the other party;
(d) Either Crestar or Crestar Bank MD on the one
hand or AB or Annapolis on the other hand, as expressed
by their respective Boards of Directors, in the event
that any of the conditions precedent to the obligations
of such parties to consummate the Transaction have not
been satisfied or fulfilled or waived by the party
entitled to so waive on or before the Closing Date,
provided that neither party shall be entitled to
terminate this Agreement pursuant to this subparagraph
(d) if the condition precedent or conditions precedent
which provide the basis for termination can reasonably be
and are satisfied within a reasonable period of time, in
which case, the Closing Date shall be appropriately
postponed;
(e) Crestar and Crestar Bank MD, if the Boards of
Directors of Crestar and Crestar Bank MD shall have
determined in their sole discretion, exercised in good
faith, that the Transaction, has become inadvisable or
impracticable by reason of (A) the threat or the
institution of any litigation, proceeding or
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investigation to restrain or prohibit the consummation of
the transactions contemplated by this Agreement or to
obtain other relief in connection with this Agreement or
(B) public commencement of a competing offer for AB
Common Stock which is significantly better than Crestar's
offer, is accepted or not opposed by AB and which Crestar
certifies to AB, in writing, it is unwilling to meet;
(f) Crestar, Crestar Bank MD, AB or Annapolis, if
the Federal Reserve Board, the FDIC, the OTS or the
Maryland Banking Division deny approval of the
Transaction and the time period for all appeals or
requests for reconsideration has run; or
(g) Crestar and Crestar Bank MD if dissenters to the
Holding Company Merger shall have been filed with AB by
the holders of 15% or more of the outstanding shares of
AB Common Stock pursuant to Section 262 of the
Delaware General Corporation Law.
7.2. Effect of Termination. In the event of the
termination and abandonment of this Agreement and the Merger
pursuant to Section 7.1, this Agreement, other than the
provisions of Sections 4.1 (last three sentences) and 9.1, shall
become void and have no effect, without any liability on the part
of any party or its directors, officers or shareholders. Nothing
contained in this Section 7.2 shall relieve any party from
liability for any breach of this Agreement.
7.3. Survival of Representations, Warranties and
Covenants. The respective representations and warranties,
obligations, covenants and agreements (except for those contained
in Sections 1.3, 1.4, 2.1, 2.2, 2.3, 2.4, 2.5, 2.6, 4.1 (last
three sentences), 8.1, 8.2, 8.3, 8.4 and 9.1, which shall survive
the effectiveness of the Transaction) of Crestar, Crestar Bank
MD, AB and Annapolis contained herein shall expire with, and be
terminated and extinguished by, the effectiveness of the
Transaction and shall not survive the Effective Time of the
Merger.
7.4. Waiver and Amendment. Any term or provision of
this Agreement may be waived in writing at any time by the party
which is, or whose shareholders are, entitled to the benefits
thereof and this Agreement may be amended or supplemented by
written instructions duly executed by all parties hereto at any
time, whether before or after the meeting of AB shareholders
referred to in Section 4.2 hereof, excepting statutory
requirements and requisite approvals of shareholders and
regulatory authorities, provided that any such amendment or
waiver executed after shareholders of AB have approved this
Agreement and the Holding Company Plan of Merger shall not
modify either the amount or form of the consideration to be received by
such shareholders for their shares of AB Common Stock or
otherwise materially adversely affect such shareholders without
their approval.
ARTICLE VIII
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Additional Covenants
8.1. Payment of the Note. If the Transaction is
consummated on or before June 15, 1994 and the written consent of
FNBM to enter into this Agreement and consummate the transactions
hereby has not been obtained within 30 days before the Closing
Date, Crestar agrees to extend a loan (the "Crestar Loan") to
AB solely to enable AB to pay its FNBM Loan immediately prior to the
Closing Date will be made in accordance with the terms described
on Annex I hereto.
If the Transaction is not consummated by June 15, 1994,
Crestar agrees to extend the Crestar Loan to AB solely to enable
AB to pay the FNBM Loan on June 30, 1994. The Crestar Loan will
be made in accordance with the terms described on Annex I hereto.
8.2. Indemnification and AB Officers and Directors
Liabilities Insurance. After the Effective Time of the
Merger, Crestar shall indemnify and hold harmless directors, officers,
employees and agents who have rights to indemnification from AB
or Annapolis under the By-laws of AB and Annapolis (the
"Indemnified Parties") from and against any and all claims
arising out of or in connection with activities in such capacity
prior to the Effective Time of the Merger, or on behalf of, or at
the request of AB, Annapolis or any other direct or indirect
subsidiary of AB ("Claims") and shall advance expenses incurred
with respect to the foregoing, as they are incurred, in each case
to the fullest extent permitted under the By-laws of AB and
Annapolis as in effect on the date hereof and the
Delaware General Corporation Law and the regulations of the OTS, to the
extent legally permitted to do so, which obligations shall
survive the Transaction and shall continue in full force and
effect following the Effective Time of the Merger for six years,
or if the Transaction does not become effective, Crestar's
obligation to indemnify and hold harmless the Indemnified Parties
shall be secondary to the obligation of AB and Annapolis to
provide indemnification as permitted under their respective By-
laws, the Delaware General Corporation Law and the regulations of
the OTS, to the extent legally permitted to do so, and such
obligation of Crestar shall be limited to the liabilities
and claims of the Indemnified Parties that arise in connection with
the Option Agreement during the term thereof and, if the Option
Agreement is exercised, shall survive the exercise therefor for a
period of six years, provided that all rights to indemnification
in respect of any claim asserted or made within such period shall
continue until the final disposition of such claim. Crestar will
provide officers and directors liability insurance coverage to
all AB and Annapolis directors and officers, whether or not they
become part of the Crestar organization after the Effective Time
of the Merger to the same extent it is provided to Crestar's
officers and directors, provided that coverage will not extend to
acts as to which notice has been given prior to the Effective
Time of the Merger. The obligations of Crestar provided under
this Section 8.2 are intended to benefit, and be enforceable
against Crestar directly by, the Indemnified Parties, and shall
be binding on all respective successors and permitted assigns of
Crestar.
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8.3. Employee Matters. (a) Annapolis Senior
Management Group. Prior to the Effective Time of the
Bank Merger, members of Annapolis' senior management
group will be interviewed by Crestar with the goal of
determining if there are mutually beneficial employment
opportunities available within Crestar.
(b) Employment Agreements. Certain officers of
Annapolis and AB will be offered Employment Agreements or
severance payments on the terms described on Schedule N.
(c) Other Employees. Crestar will undertake to
continue employment of all Annapolis branch personnel who
meet Crestar's employment qualification requirements,
either at existing Annapolis offices or at Crestar
offices. Annapolis non-branch personnel not offered
employment will be interviewed prior to the Effective
Time of the Holding Company Merger for open
positions within Crestar. Any employee who is terminated or whose
position is eliminated by Crestar within six months after
the Effective Time of the Bank Merger, and not offered a
"comparable job" (other than those officers named in
Schedule N; or those under employment contracts who are
terminated, if any, and paid in accordance with their
respective employment contract), will be paid severance
pay equal to one week's base pay for each year of service
with Annapolis up to 20 years and two weeks of base pay
for each year of service with Annapolis over 20 years,
but in no case less than eight weeks' base pay.
For purposes of this subsection, "comparable job" shall have
the meaning assigned to it on Schedule N.
8.4. Employee Benefit Matters. (a) Transferred
Employees. All employees of AB or Annapolis immediately
prior to the Effective Time of the Bank Merger who are
employed by Crestar Bank MD or another Crestar subsidiary
following the Effective Time of the Bank Merger
("Transferred Employees") will be covered by Crestar's
employee benefit plans as to which they are eligible
based on their length of service, compensation,
job classification, and position, including, where
applicable, any incentive compensation plan.
Notwithstanding the foregoing, Crestar may determine to
continue any of the AB or Annapolis benefit plans for
Transferred Employees in lieu of offering participation
in Crestar's benefit plans providing similar benefits
(e.g., medical and hospitalization benefits), to
terminate any of the AB or Annapolis benefit plans, or to
merge any such benefit plans with Crestar's benefit
plans. Crestar agrees that any pre-existing condition,
limitation or exclusion in its health plans shall not
apply to Transferred Employees or their covered
dependents who are covered under a medical or
hospitalization indemnity plan maintained by AB or
Annapolis on the date of the Bank Merger and then change
coverage to Crestar's medical or hospitalization
indemnity health plan at the time such Transferred
Employees are first given the option to enroll in
I-43
Crestar's health plans. Except as specifically provided
in this Section 8.4 and as otherwise prohibited by law,
Transferred Employees' service with AB and Annapolis
shall be recognized as service with Crestar for purposes
of Crestar's benefit plans, subject to applicable break-
in-service rules. Crestar agrees that immediately
following the Bank Merger, all participants who then
have accounts in the Annapolis Federal Savings Bank 401(k)
Profit Sharing and Trust Plan (the "Annapolis 401(k)
Plan") shall be fully vested in their account balances.
Crestar, at its election, may continue the Annapolis
401(k) Plan for the benefit of Transferred Employees, may
merge the Annapolis 401(k) Plan into the Crestar
Employees Thrift and Profit Sharing Plan (the "Crestar
Thrift Plan"), or may cease additional benefit accruals
under and contributions to the Annapolis 401(k) Plan and
continue to hold the assets of such Plan until they are
distributable in accordance with its terms. In the event
of a merger of the Annapolis 401(k) Plan and the Crestar
Thrift Plan or a cessation of accruals and contributions
under the Annapolis 401(k) Plan, the Crestar Thrift Plan
will recognize for purposes of eligibility to
participate, early retirement, and eligibility for
vesting, all Transferred Employees' service with AB and
Annapolis, subject to applicable break-in-service rules.
(b) Other Retiree and Health Benefits. The
Retirement Plan for Employees of Crestar and Affiliated
Corporations ("Crestar's Retirement Plan") will recognize
for purposes of vesting, eligibility to participate and
eligibility for early retirement only, all Transferred
Employees' service with AB and Annapolis, subject to
applicable break-in-service rules. Crestar also will
assume the written retirement obligations of AB and
Annapolis and offer retiree health coverage as described
on Schedule N.
8.5. Stock Options. Allen Bach is the only holder of
outstanding AB Options for 5,000 shares, and shall elect, by
giving notice to AB prior to the Closing Date, either to (a)
allow the AB Options to expire at the Effective Time of the
Holding Company Merger and following the Effective Time of the
Holding Company Merger receive a cash payment (less all
applicable withholding taxes) equal to the excess of (i) the
aggregate Price Per Share of the AB Common Stock represented by
his AB Options over (ii) the aggregate exercise price of such AB
Options, or (b) exercise the AB Options for AB Common Stock prior
to the Closing Date. Crestar, as the successor to AB in the
Holding Company Merger, agrees to make any cash payment required
under this Section promptly following consummation of the Holding
Company Merger.
8.6. Crestar Bank MD/Annapolis Local Advisory Board of
Directors. Crestar Bank MD will offer all members of the boards
of directors of AB and Annapolis a position on Crestar Bank MD's
local advisory board in Annapolis for a term of one year
commencing at the Effective Time of the Merger. Such members who
agree to serve on the Annapolis local advisory board in
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accordance with the guidelines set forth in the Crestar Advisory
Board Handbook attached hereto as Annex VIII will receive a fee
of $1,000. Crestar agrees to waive the age limitation for the
one year period. In addition, the members of the Annapolis local
advisory board shall receive a fee of $300 for each meeting
attended.
ARTICLE IX
Miscellaneous
9.1. Expenses. Each party hereto shall bear and pay
the costs and expenses incurred by it relating to the
transactions contemplated hereby.
9.2. Entire Agreement. This Agreement contains the
entire agreement among Crestar, Crestar Bank MD, AB and Annapolis
with respect to the Transaction and the related transactions
and supersedes all prior arrangements or understandings with respect
thereto.
9.3. Descriptive Headings. Descriptive headings are
for convenience only and shall not control or affect the meaning
or construction of any provisions of this Agreement.
9.4. Notices. All notices or other communications
which are required or permitted hereunder shall be in writing and
sufficient if delivered personally or sent by registered or
certified mail, postage prepaid, addressed as follows:
If to Crestar or Crestar Bank MD:
Crestar Financial Corporation
P. O. Box 26665
919 East Main Street
Richmond, Virginia 23261-6665
Attention: John C. Clark III
Senior Vice President, Secretary
and General Counsel
Copy to:
Lathan M. Ewers, Jr.
Hunton & Williams
951 East Byrd Street
Richmond, Virginia 23219
If to AB or Annapolis:
Annapolis Bancorp, Inc.
147 Old Solomons Island RoadAnnapolis, Maryland 21401
Attention: Gilbert L. Hardesty,
President
I-45
Copy to:
Edward L. Lublin
Manatt, Phelps & Phillips
1200 New Hampshire Avenue N.W.
Washington, D.C. 20036
9.5. Counterparts. This Agreement may be executed in
any number of counterparts, and each such counterpart hereof
shall be deemed to be an original instrument, but all such
counterparts together shall constitute but one agreement.
9.6. Governing Law. Except as may otherwise be
required by the laws of the United States, this Agreement shall
be governed by and construed in accordance with the laws of
Virginia.
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IN WITNESS WHEREOF, each of the parties hereto has caused
this Agreement to be executed on its behalf and its corporate
seal to be hereunto affixed and attested by its officers
thereunto duly authorized, all as of the day and year first above
written.
ATTEST: (SEAL) CRESTAR FINANCIAL CORPORATION
By John C. Clark III By /s/ Richard G. Tilghman
Secretary Name: Richard G. Tilghman
Title: Chairman and Chief
Executive Officer
ATTEST: (SEAL) CRESTAR BANK MD
By John C. Clark III By C. Garland Hagen
Assistant-Secretary Name: C. Garland Hagan
Title: Executive Vice
President
ATTEST: (SEAL) ANNAPOLIS BANCORP, INC.
By Gail L. Marchand By /s/ Gilbert L. Hardesty
Secretary Name: Gilbert L. Hardesty
Title: President/Chief
Executive Officer
ATTEST: (SEAL) ANNAPOLIS FEDERAL SAVINGS BANK
By Gail L. Marchand By /s/ Gilbert L. Hardesty
Secretary Name: Gilbert L. Hardesty
Title: President/Chief
Executive Officer
I-47
Exhibit A
PLAN OF MERGER
OF
ANNAPOLIS BANCORP, INC.
INTO
CRESTAR FINANCIAL CORPORATION
Section 1. Annapolis Bancorp, Inc. ("AB") shall, upon
the later of the time that Articles of Merger are made effective
by the State Corporation Commission of Virginia or
the Certificate of Merger is made effective by the Secretary of the
State of Delaware (the "Effective Time of the Holding Company
Merger"), be merged (the "Holding Company Merger") into Crestar
Financial Corporation ("Crestar") which shall be the "Surviving
Company."
Section 2. Conversion of Stock. At the Effective Time
of the Holding Company Merger:
(i) Each share of Crestar Common Stock outstanding
immediately prior to the Effective Time of the
Holding Company Merger shall continue unchanged as an outstanding
share of Common Stock of the Surviving Company.
(ii) Subject to Section 4, each share of AB Common
Stock outstanding immediately prior to the Effective Time
of the Holding Company Merger other than shares held by
Crestar, shares to be exchanged for cash and Dissenting
Shares (as hereinafter defined) and which, under the
terms of Section 3 of this Plan of Merger, is to be
converted into Crestar Common Stock, shall be converted
into the number of shares of Crestar Common
Stock determined by dividing the $12.75 per share price of AB
Common Stock (the "Price Per Share") by the average of
the mean of the closing bid and asked prices of Crestar
Common Stock as reported on the New York Stock Exchange
for each of the 20 trading days ending on the third day
prior to the Closing Date, as defined in the Agreement
and Plan of Reorganization, dated as of the date hereof,
among Crestar, Crestar Bank MD, AB and Annapolis Federal
Savings Bank (the "Agreement") (the "Average Closing
Price") (the result of the quotient determined by
dividing the Price Per Share by the Average Closing Price
being hereinafter called the "Exchange Ratio").
(iii) Subject to Section 4, each share of AB Common
Stock outstanding immediately prior to the Effective Time
of the Holding Company Merger which, under the terms of
Section 3, is to be converted into the right to receive
cash, shall be converted into the right to receive the
Price Per Share in cash (less all applicable withholding
A-1
taxes).
(iv) At the Effective Time of the Holding Company
Merger, AB's transfer books shall be closed and no
further transfer of AB Common Stock shall be permitted.
Section 3. Manner of Conversion. The manner in which
each outstanding share of AB Common Stock shall be converted into
Crestar Common Stock or cash, as specified in Section 2 hereof,
after the Effective Time of the Holding Company Merger, shall be
as follows:
(i) Each share of AB Common Stock, other than
shares held by Crestar and shares for which a cash
election has been made (and are not exchanged for cash
because of Section 4), shall be exchanged for shares of
Crestar Common Stock as determined by the Exchange Ratio.
(ii) No fractional shares of Crestar Common Stock
shall be issued, but instead the value of fractional
shares shall be paid in cash (less all applicable
withholding taxes), for which purpose the Average Closing
Price shall be employed.
(iii) Certificates for shares of AB Common Stock
shall be submitted in exchange for Crestar Common Stock
accompanied by a Letter of Transmittal (to be promptly
furnished by Crestar Bank to AB's shareholders of record
as of the Effective Time of the Holding Company Merger).
Until so surrendered, each outstanding certificate which,
prior to the Effective Time of the Holding Company
Merger, represented AB Common Stock, shall be deemed to
evidence only the right to receive (a) shares of Crestar
Common Stock as determined by the Exchange Ratio, or (b)
in the case of shares for which cash elections shall have
been made, cash (less all applicable withholding taxes)
multiplied by the number of shares evidenced by the
certificates without interest thereon. Until such
outstanding shares formerly representing AB Common Stock
are so surrendered, no dividend payable to holders
of record of Crestar Common Stock as of any date subsequent
to the Effective Time of the Holding Company Merger shall
be paid to the holder of such outstanding certificates in
respect thereof. Upon such surrender, dividends accrued
or declared on Crestar Common Stock shall be paid in
accordance with Section 2.2 of the Agreement.
Section 4. Proration of Shares Purchased with Cash. The
number of shares of AB Common Stock to be exchanged for cash,
when added to Dissenting Shares, cannot exceed 30% of the
outstanding shares of AB Common Stock immediately prior to
the Effective Time of the Holding Company Merger. If shareholders of
AB elect to exchange for cash more than this number of shares of
AB Common Stock, Crestar shall purchase all shares submitted by
holders of 100 or fewer shares (if such holder has submitted all
his shares for cash exchange) and then purchase shares submitted
by other holders pro rata so as to require Crestar to pay cash
for no more than this number of shares of AB Common Stock. A
shareholder submitting shares for cash purchase all of whose
A-2
shares are not exchanged for cash because of the proration
provisions of this Section 4 shall receive shares of Crestar
Common Stock at the Exchange Ratio.
Section 5. Dissenting Shares. Notwithstanding anything
in this Plan of Merger to the contrary, shares of AB Common Stock
which are issued and outstanding immediately prior to
the Effective Time of the Holding Company Merger and which are held
by a shareholder who has the right (to the extent such right is
available by law) to demand and receive payment of the fair value
of his shares of AB Common Stock pursuant to Section 262 of the
Delaware General Corporation Law (the "Dissenting Shares") shall
be canceled, and shall not be converted into or be exchangeable
for the right to receive the consideration provided in Section 2
of this Plan of Merger, unless and until such holder shall fail
to perfect his right to an appraisal of his shares of AB common
stock or shall have effectively withdrawn or lost such right
under the Delaware General Corporation Law, as the case may be.
If such holder shall have so failed to perfect or shall have
effectively withdrawn or lost such right, his shares of AB Common
Stock shall thereupon be deemed to have been converted into, at
the Effective Time of the Holding Company Merger, shares of
Crestar Common Stock as determined by the Exchange Ratio.
Section 6. Articles of Incorporation, Bylaws and
Directors of the Surviving Company. At the Effective Time of the
Holding Company Merger, there shall be no change caused by the
Holding Company Merger in the Articles of Incorporation (except
any change caused by the filing of Articles of Merger relating to
the Holding Company Merger), By-laws, or Board of Directors of
the Surviving Company.
Section 7. Conditions to Holding Company Merger.
Consummation of the Merger is subject to the following
conditions:
(i) The approving vote of the holders of more than
50% of the outstanding shares of AB Common Stock entitled
to vote.
(ii) The approval of the Holding Company Merger by
the Board of Governors of the Federal Reserve System and
the Office of Thrift Supervision.
(iii) The satisfaction of the conditions or the
waiver of such conditions by the party for whose benefit
they were imposed, as contained in the Agreement.
Section 8. Effect of the Holding Company Merger. The
Holding Company Merger, upon the Effective Time of the Holding
Company Merger, shall have the effect provided by Section 13.1-721
of the Code of Virginia and Section 259, 261 and 328 of the
Delaware General Corporation Law.
Section 9. Amendment. Pursuant to Section 13.1-718(I)
of the Virginia Stock Corporation Act, and Section 252(e) of the
Delaware General Corporation Law, the Boards of Directors of
Crestar and AB reserve the right to amend this Plan of Merger at
any time prior to issuance of the certificate of merger by the
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State Corporation Commission of Virginia, provided, however, that
any such amendment made subsequent to the submission of this Plan
of Merger to the shareholders of AB, may not: (i) alter or
change the amount or kind of shares, securities, cash, property
or rights to be received in exchange for or in conversion of all
or any of the shares of any class or series of AB; (ii) alter or
change any of the terms and conditions of this Plan of Merger if
such alteration or change would adversely affect the shares of
any class or series of AB; or (iii) alter or change any term of
the certificate of incorporation of AB (except as provided
herein).
A-4
Annex II
STOCK OPTION AGREEMENT
STOCK OPTION AGREEMENT, dated as of November 16, 1993
(the "Agreement"), by and between Annapolis Bancorp, Inc., a
Delaware corporation ("Issuer"), and Crestar Financial
Corporation, a Virginia corporation ("Grantee").
WHEREAS, Grantee and Issuer have entered into a letter of
intent dated as of November 16, 1993 (the "Letter of Intent")
which Letter of Intent is intended to be merged into a definitive
Agreement and Plan of Reorganization (the "Plan"), providing for,
among other things, the merger of Issuer with and into Grantee,
with Grantee as the surviving corporation (the "Holding Company
Merger") and the subsequent merger of Annapolis Federal Savings
Bank into Crestar Bank MD (together with the Holding Company
Merger, the "Transaction"); and
WHEREAS, as a condition and inducement to Grantee's
execution of the Letter of Intent and the Plan, Grantee has
required that Issuer agree, and Issuer has agreed, to grant
Grantee the Option (as defined below);
NOW, THEREFORE, in consideration of the foregoing and the
respective representations, warranties, covenants and agreements
set forth herein and in the Letter of Intent and to be set forth
in the Plan, and intending to be legally bound hereby, Issuer and
Grantee agree as follows:
1. Defined Terms. Capitalized terms which are used but
not defined herein shall have the meanings ascribed to such terms
in the Letter of Intent.
2. Grant of Option. Subject to the terms and conditions
set forth herein, Issuer hereby grants to Grantee an irrevocable
option (the "Option") to purchase up to 240,000 shares (as
adjusted as set forth herein) (the "Option Shares", which shall
include the Option Shares before and after any transfer of such
Option Shares) of Common Stock ("Issuer Common Stock"), of Issuer
at a purchase price per Option Share (the "Purchase Price") of
$10.00.
3. Exercise of Option.
(a) Provided that (i) Grantee shall not be
in material breach of the agreements or covenants contained in this
Agreement or in the Letter of Intent or, when executed, the Plan,
and (ii) no preliminary or permanent injunction or other order
against the delivery of shares covered by the Option issued by
any court of competent jurisdiction in the United States shall be
in effect, Grantee may exercise the Option, in whole or in not
more than two parts, at any time and from time to time following
II-1
the occurrence of a Purchase Event; provided, that the Option
shall terminate and be of no further force and effect upon the
earliest to occur of (A) the Effective Time of the Holding
Company Merger, (B) termination of the Letter of Intent or, when
executed, the Plan in accordance with the terms thereof prior to
the occurrence of a Purchase Event or a Preliminary Purchase
Event (other than a termination of the Letter of Intent or,
when executed, the Plan by Grantee because of Issuer's breach of a
representation or warranty contained therein (a "Default
Termination")), (C) 12 months after termination of the Letter of
Intent or the Plan, as the case may be, by Grantee pursuant to a
Default Termination, (D) 12 months after termination of the
Letter of Intent, or the Plan, as the case may be (other than
pursuant to a Default Termination) following the occurrence of a
Purchase Event or a Preliminary Purchase Event, (E) upon receipt
of any order or notice of the Board of Governors of the Federal
Reserve System, the Office of Thrift Supervision ("OTS"), the
Federal Deposit Insurance Corporation, the Maryland
Bank Commissioner, Division of Financial Regulation, the Secretary of
State of Delaware or the State Corporation Commission of Virginia
denying approval of the Transaction, or (F) March 31, 1995 and
provided, further, that any purchase of shares upon exercise of
the Option shall be subject to compliance with applicable law,
including the Bank Holding Company Act of 1956 (the "BHC Act").
The rights set forth in Section 8 shall terminate when the right
to exercise the Option terminates (other than as a result of a
complete exercise of the Option) as set forth above.
(b) As used herein, a "Purchase Event" means any of
the following events:
(i) Without Grantee's prior written consent,
Issuer shall have authorized, recommended or publicly-
proposed, or publicly announced an intention to
authorize, recommend or propose, or entered into an
agreement with any person (other than Grantee or any
subsidiary of Grantee) to effect an, Acquisition
Transaction (as defined below). As used herein, the term
Acquisition Transaction shall mean (A) a merger,
consolidation or similar transaction involving Issuer or
any of its subsidiaries (other than transactions solely
between Issuer's subsidiaries), (B) the disposition, by
sale, lease, exchange or otherwise, of assets of Issuer
or any of its subsidiaries representing in either case
15% or more of the consolidated assets of Issuer and its
subsidiaries, or (C) the issuance, sale or other
disposition of (including by way of merger,
consolidation, share exchange or any similar transaction)
securities representing 25% or more of the voting power
of Issuer or any of its subsidiaries (any of the
foregoing an "Acquisition Transaction"); or
(ii) any person (other than Grantee or any
subsidiary of Grantee) shall have acquired beneficial
ownership (as such term is defined in Rule 13d-3
promulgated under the Securities Exchange Act of 1934, as
amended (the "1934 Act") of or the right to acquire
beneficial ownership of, or any "group" (as such term is
II-2
defined under the 1934 Act) shall have been formed which
beneficially owns or has the right to acquire beneficial
ownership of, 25% or more of the then outstanding shares
of Issuer Common Stock.
(c) As used herein, a "Preliminary Purchase Event"
means any of the following events:
(i) any person (other than Grantee or any
subsidiary of Grantee) shall have commenced (as such term
is defined in Rule 14d-2 under the 1934 Act) or shall
have filed a registration statement under the Securities
Act of 1933, as amended (the "1933 Act"), with respect
to, a tender offer or exchange offer to purchase any
shares of Issuer Common Stock such that, upon
consummation of such offer, such person would own or
control 25% or more of the then outstanding shares of
Issuer Common Stock (such an offer being referred
to herein as a "Tender Offer" or an "Exchange Offer",
respectively); or
(ii) the holders of Issuer Common Stock shall not
have approved the Plan at the meeting of such
stockholders held for the purpose of voting on the Plan,
such meeting shall not have been held or shall have been
canceled prior to termination of the Plan or Issuer's
Board of Directors shall have withdrawn or modified in a
manner adverse to Grantee the recommendation of Issuer's
Board of Directors with respect to the Plan, in each case
after it shall have been publicly announced that any
person (other than Grantee or any subsidiary of Grantee)
shall have (A) made, or disclosed an intention to make, a
proposal to engage in an Acquisition Transaction, (B)
commenced a Tender Offer or filed a registration
statement under the 1933 Act with respect to an Exchange
Offer, or (C) filed an application (or given a notice),
whether in draft or final form, under the BHC Act, the
Bank Merger Act or the Change in Bank Control Act of
1978, for approval to engage in an Acquisition
Transaction.
As used in this Agreement, "person" shall have the
meaning specified in Sections 3(a)(9) and 13(d)(3) of the 1934
Act.
(d) In the event Grantee wishes to exercise the
Option, it shall send to Issuer a written notice (the date of
which being herein referred to as the "Notice Date") specifying
(i) the total number of Option Shares it intends to purchase
pursuant to such exercise, and (ii) a place and date not earlier
than three business days nor later than 15 business days from
the Notice Date for the closing (the "Closing") of such purchase (the
"Closing Date"). If prior notification to or approval of the
Board of Governors of the Federal Reserve System (the "Federal
Reserve Board") or any other regulatory authority is required in
connection with such purchase, Issuer shall cooperate with
Grantee in the filing of the required notice of application for
approval and the obtaining of such approval and the Closing shall
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occur immediately following such regulatory approvals (and any
mandatory waiting periods).
4. Payment and Delivery of Certificates.
(a) On each Closing Date, Grantee shall (i) pay to
Issuer, in immediately available funds by wire transfer to a
bank account designated by Issuer, an amount equal to the Purchase
Price multiplied by the number of Option Shares to be purchased
on such Closing Date, and (ii) present and surrender this
Agreement to Issuer at the address of Issuer specified in Section
12(f) hereof.
(b) At each Closing, simultaneously with the delivery
of immediately available funds and surrender of this Agreement as
provided in Section 4(a), (i) Issuer shall deliver to Grantee
(A) a certificate or certificates representing the Option Shares
to be purchased at such Closing, which Option Shares shall be
free and clear of all liens, claims, charges and encumbrances of
any kind whatsoever and subject to no pre-emptive rights, and (B)
if the Option is exercised in part only, an executed new
agreement with the same terms as this Agreement evidencing the
right to purchase the balance of the shares of Issuer Common
Stock purchasable hereunder, and (ii) Grantee shall deliver to
Issuer a letter agreeing that Grantee shall not offer to sell or
otherwise dispose of such Option Shares in violation of
applicable federal and state law or of the provisions of this
Agreement.
(c) In addition to any other legend that is required
by applicable law, certificates for the Option Shares delivered
at each Closing shall be endorsed with a restrictive legend which
shall read substantially as follows:
THE TRANSFER OF THE STOCK REPRESENTED BY THIS CERTIFICATE IS
SUBJECT TO RESTRICTIONS ARISING UNDER THE SECURITIES ACT OF 1933,
AS AMENDED, AND PURSUANT TO THE TERMS OF A STOCK OPTION AGREEMENT
DATED AS OF NOVEMBER 16, 1993. A COPY OF SUCH AGREEMENT WILL BE
PROVIDED TO THE HOLDER HEREOF WITHOUT CHARGE UPON RECEIPT BY
ISSUER OF A WRITTEN REQUEST THEREFOR.
It is understood and agreed that the above legend shall
be removed by delivery of substitute certificate(s) without such
legend if Grantee shall have delivered to Issuer a copy of a
letter from the staff of the Securities and Exchange Commission
(the "SEC"), or an opinion of counsel in form and substance
reasonably satisfactory to Issuer and its counsel, to the effect
that such legend is not required for purposes of the 1933 Act.
5. Representations and Warranties of Issuer. Issuer
hereby represents and warrants to Grantee as follows:
(a) Due Authorization. Issuer has all requisite
corporate power and authority to enter into this Agreement and,
subject to any approvals referred to herein, to consummate the
transactions contemplated hereby. The execution and delivery of
this Agreement and the consummation of the transactions
contemplated hereby have been duly authorized by all necessary
II-4
corporate action on the part of Issuer. This Agreement has been
duly executed and delivered by Issuer. The execution and
delivery of this Agreement, the consummation of the transactions
contemplated hereby and compliance by Issuer with any of the
provisions hereof will not (i) conflict with or result in a
breach of any provision of its Articles of Incorporation or By-
laws or a default (or give rise to any right of
termination, cancellation or acceleration) under any of the terms, conditions
or provisions of any note, bond, debenture, mortgage, indenture,
license, material agreement or other material instrument or
obligation to which Issuer is a party, by which it or any of its
properties or assets may be bound, or (ii) violate any order,
writ, injunction, decree, statute, rule or regulation applicable
to Issuer or any of its properties or assets. No consent or
approval by any governmental authority, other than compliance
with applicable federal and state securities and banking laws,
and regulations of the OTS and the Secretary of State of
Delaware, is required of Issuer in connection with the execution
and delivery by Issuer of this Agreement or the consummation by
Issuer of the transactions contemplated hereby.
(b) Authorized Stock. Issuer has taken all necessary
corporate and other action to authorize and reserve and to permit
it to issue, and, at all times from the date hereof until the
obligation to deliver Issuer Common Stock upon the exercise of
the Option terminates, will have reserved for issuance, upon
exercise of the Option, the number of shares of Issuer Common
Stock necessary for Grantee to exercise the Option, and Issuer
will take all necessary corporate action to authorize and reserve
for issuance all additional shares of Issuer Common Stock or
other securities which may be issued pursuant to Section 7 upon
exercise of the Option. The shares of Issuer Common Stock to be
issued upon due exercise of the Option, including all additional
shares of Issuer Common Stock or other securities which may be
issuable pursuant to Section 7, upon issuance pursuant hereto,
shall be duly and validly issued, fully paid and nonassessable,
and shall be delivered free and clear of all liens, claims,
charges and encumbrances of any kind or nature whatsoever,
including any preemptive rights of any stockholder of Issuer.
6. Representations and Warrants of Grantee.
Grantee hereby represents and warrants to Issuer that:
(a) Due Authorization. Grantee has all requisite
corporate power and authority to enter into this Agreement and,
subject to any approvals or consents referred to herein, to
consummate the transactions contemplated hereby. The execution
and delivery of this Agreement and the consummation of the
transactions contemplated hereby have been duly authorized by all
necessary corporate action on the part of Grantee. This
Agreement has been duly executed and delivered by Grantee.
(b) Purchase Not for Distribution. This Option is
not being, and any Option Shares or other securities acquired by
Grantee upon exercise of the Option will not be, acquired with a
view to the public distribution thereof and will not be
transferred or otherwise disposed of except in a transaction
registered or exempt from registration under the 1933 Act.
II-5
7. Adjustment upon Changes in Capitalization, etc.
(a) In the event of any change in Issuer Common Stock
by reason of a stock dividend, stock split, split-up,
recapitalization, combination, exchange of shares or similar
transaction, the type and number of shares or securities subject
to the Option, and the Purchase Price therefor, shall be
adjusted appropriately, and proper provision shall be made in the
agreements governing such transaction so that Grantee shall
receive, upon exercise of the Option, the number and class of
shares or other securities or property that Grantee would have
received in respect of Issuer Common Stock if the Option had been
exercised immediately prior to such event, or the record date
therefor, as applicable. If any additional shares of Issuer
Common Stock are issued after the date of this Agreement (other
than pursuant to an event described in the first sentence of this
Section 7(a)), the number of shares of Issuer Common Stock
subject to the Option shall he adjusted so that, after
such issuance, it, together with any shares of Issuer Common Stock
previously issued pursuant hereto, equals 19.9% of the number of
shares of Issuer Common Stock then issued and outstanding,
without giving effect to any shares subject to or issued pursuant
to the Option.
(b) In the event that Issuer shall enter in an
agreement: (i) to consolidate with or merge into any person,
other than Grantee or one of its subsidiaries, and shall not be
the continuing or surviving corporation of such consolidation or
merger, (ii) to permit any person, other than Grantee or one of
its subsidiaries, to merge into Issuer and Issuer shall be the
continuing or surviving corporation, but, in connection with such
merger, the then outstanding shares of Issuer Common Stock shall
be changed into or exchanged for stock or other securities of
Issuer or any other person or cash or any other property or the
outstanding shares of Issuer Common Stock immediately prior to
such merger shall after such merger represent less than 50% of
the outstanding shares and share equivalents of the merged
company, or (iii) to sell or otherwise transfer all or
substantially all of its assets to any person, other than Grantee
or one of its subsidiaries, then, and in each such case,
the agreement governing such transaction shall make proper provisions
so that upon the consummation of any such transaction and upon
the terms and conditions set forth herein, Grantee shall receive
for each Option Share with respect to which the Option has not
been exercised an amount of consideration in the form of and
equal to the per share amount of consideration that would be
received by the holder of one share of Issuer Common Stock less
the Purchase Price (and, in the event of an election or similar
arrangement with respect to the type of consideration to be
received by the holders of Issuer Common Stock, subject to the
foregoing, proper provision shall be made so that the holder of
the Option would have the same election or similar rights as
would the holder of the number of shares of Issuer Common Stock
for which the Option is then exercisable).
(c) Issuer shall not enter into any agreement of the
type described in Section 7(b) unless the other party thereto
commits to provide the funding required for Issuer to pay the
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Section 8 Repurchase Consideration to the extent required by
Section 8 hereof.
8. Repurchase at the Option of Grantee.
(a) Subject to the last sentence of Section 3(a), at
the request of Grantee at any time commencing upon the
first occurrence of a Repurchase Event (as defined in Section 8(d)) and
ending 12 months immediately thereafter, Issuer shall repurchase
from Grantee (i) the Option and (ii) all shares of Issuer Common
Stock purchased by Grantee pursuant hereto with respect to which
Grantee then has beneficial ownership. The date on which Grantee
exercises its rights under this Section 8 is referred to as the
"Request Date". Such repurchase shall be at an aggregate price
(the "Section 8 Repurchase Consideration") equal to the sum of:
(i) the aggregate Purchase Price paid by Grantee
for any shares of Issuer Common Stock acquired pursuant
to the Option with respect to which Grantee then has
beneficial ownership;
(ii) the excess, if any, of (x) the Applicable
Price (as defined below) for each share of Issuer Common
Stock over (y) the Purchase Price (subject to adjustment
pursuant to Section 7), multiplied by the number of
shares of Issuer Common Stock with respect to which the
Option has not been exercised; and
(iii) the excess, if any, of the Applicable Price
over the Purchase Price (subject to adjustment pursuant
to Section 7) paid (or, in the case of Option Shares with
respect to which the Option has been exercised but the
Closing Date has not occurred, payable) by Grantee for
each share of Issuer Common Stock with respect to which
the Option has been exercised and with respect to which
Grantee then has beneficial ownership, multiplied by the
number of such shares.
(b) If Grantee exercises its rights under this
Section 8, Issuer shall, within 10 business days after
the Request Date, pay the Section 8 Repurchase Consideration to
Grantee in immediately available funds, and contemporaneously
with such payment Grantee shall surrender to Issuer the Option
and the certificates evidencing the shares of Issuer Common Stock
purchased thereunder with respect to which Grantee then has
beneficial ownership, and Grantee shall warrant that it has sole
record and beneficial ownership of such shares and that the same
are then free and clear of all liens, claims, charges and
encumbrances of any kind whatsoever. Notwithstanding the
foregoing, to the extent that prior notification to or approval
of the Federal Reserve Board or other regulatory authority or
any lender of Issuer is required in connection with the payment of
all or any portion of the Section 8 Repurchase Consideration,
Grantee shall have the ongoing option to revoke its request for
repurchase pursuant to Section 8, in whole or in part, or to
require that Issuer deliver from time to time that portion of the
Section 8 Repurchase Consideration that it is not then so
prohibited from paying and promptly file the required notice or
II-7
application for approval and expeditiously process the same (and
each party shall cooperate with the other in the filing of any
such notice or application and the obtaining of any such
approval). If the Federal Reserve Board or any other regulatory
authority disapproves of any part of Issuer's proposed repurchase
pursuant to this Section 8, Issuer shall promptly give notice of
such fact to Grantee. If the Federal Reserve Board or
other agency or any such lender prohibits the repurchase in part but
not in whole, then Grantee shall have the right (i) to revoke the
repurchase request, or (ii) to the extent permitted by the
Federal Reserve Board or other agency, determine whether the
repurchase should apply to the Option and or Option Shares and to
what extent to each, and Grantee shall thereupon have the right
to exercise the Option as to the number of Option Shares for
which the Option was exercisable at the Request Date less the sum
of the number of shares covered by the Option in respect of which
payment has been made pursuant to Section 8(a)(ii) and the number
of shares covered by the portion of the Option (if any) that has
been repurchased. Grantee shall notify Issuer of its
determination under the preceding sentence within five (5)
business days of receipt of notice of disapproval of the
repurchase.
Notwithstanding anything herein to the contrary, all of
Grantee's rights under this Section 8 shall terminate on the date
of termination of this Option pursuant to Section 3(a).
(c) For purposes of this Agreement, the "Applicable
Price" means the highest of (i) the highest price per share
of Issuer Common Stock paid for any such share by the person or
groups described in Section 8(d)(i), (ii) the price per share of
Issuer Common Stock received by holders of Issuer Common Stock in
connection with any merger or other business combination
transaction described in Section 7(b)(i), 7(b)(ii) or 7(b)(iii),
or (iii) the highest closing sales price per share of Issuer
Common Stock quoted on the National Association of Securities
Dealers Automated Quotations System National Market System
("NASDAQ/NMS") (or if Issuer Common Stock is not quoted on
NASDAQ/NMS, the highest bid price per share as quoted on the
principal trading market or securities exchange on which
such shares are traded as reported by a recognized source chosen by
Grantee) during the 60 business days preceding the Request Date;
provided, however, that in the event of a sale of less than all
of Issuer's assets, the Applicable Price shall be the sum of the
price paid in such sale for such assets and the current market
value of the remaining assets of Issuer as determined by a
nationally recognized investment banking firm selected by
Grantee, divided by the number of shares of Issuer Common Stock
outstanding at the time of such sale. If the consideration to be
offered, paid or received pursuant to either of the foregoing
clauses (i) or (ii) shall be other than in cash, the value of
such consideration shall be determined in good faith by an
independent nationally recognized investment banking firm
selected by Grantee and reasonable acceptable to Issuer, which
determination shall be conclusive for all purposes of this
Agreement.
(d) As used herein, "Repurchase Event" shall occur if
II-8
(i) any person (other than Grantee or any subsidiary of Grantee)
shall have acquired actual ownership or control, or any "group"
(as such term is defined under the 1934 Act) shall have been
formed which shall have acquired actual ownership or control, of
50% or more of the then outstanding shares of Issuer Common
Stock, or (ii) any of the transactions described in Section
7(b)(i), 7(b)(ii) or 7(b)(iii) shall be consummated.
9. Registration Rights.
(a) Demand Registration Rights. Issuer shall,
subject to the conditions of subparagraph (c) below, if requested
by Grantee (or if applicable, a Grantee Majority), as
expeditiously as possible prepare and file a registration
statement under the 1933 Act if such registration is necessary in
order to permit the sale or other disposition of any or all
shares of Issuer Common Stock or other securities that have been
acquired by or are issuable to Grantee upon exercise of
the Option in accordance with the intended method of sale or other
disposition stated by Grantee in such request, including without
limitation a "shelf" registration statement under Rule 415 under
the 1933 Act or any successor provision, and Issuer shall use its
best efforts to qualify such shares or other securities for sale
under any applicable state securities laws.
(b) Additional Registration Rights. If Issuer at any
time after the exercise of the Option proposes to register any
shares of Issuer Common Stock under the 1933 Act in connection
with an underwritten public offering of such Issuer Common
Stock, Issuer will promptly give written notice to Grantee (and any
permitted transferee) of its intention to do so and, upon the
written request of Grantee (or any such permitted transferee of
Grantee) given within 30 days after receipt of any such notice
(which request shall specify the number of shares of Issuer
Common Stock intended to be included in such underwritten public
offering by Grantee (or such permitted transferee)), Issuer will
cause all such shares, the holders of which shall have requested
participation in such registration, to be so registered and
included in such underwritten public offering; provided, however,
that Issuer may elect to not cause any such shares to be
so registered (i) if the underwriters in good faith object for valid
business reasons, or (ii) in the case of a registration solely to
implement an employee benefit plan or a registration filed on
Form S-4; provided, further, however, that such election pursuant
to (i) may only be made one time. If some but not all the shares
of Issuer Common Stock, with respect to which Issuer shall have
received requests for registration pursuant to this subparagraph
(b), shall be excluded from such registration, Issuer shall make
appropriate allocation of shares to be registered among Grantee
and any other person (other than the Issuer) who or which is
permitted to register their shares of Issuer Common Stock
in connection with such registration pro rata in the proportion that
the number of shares requested to be registered by each such
holder bears to the total number of shares requested to be
registered by all such holders then desiring to have Issuer
Common Stock registered for sale.
(c) Conditions to Required Registration. Issuer
II-9
shall use all reasonable efforts to cause each registration
statement referred to in subparagraph (a) above to become
effective and to obtain all consents or waivers of other parties
which are required therefor and to keep such registration
statement effective; provided, however, that Issuer may delay any
registration of Option Shares required pursuant to subparagraph
(a) above for a period not exceeding 90 days provided Issuer
shall in good faith determine that any such registration would
adversely affect an offering or contemplated offering of other
securities by Issuer, and Issuer shall not be required to
register Option Shares under the 1933 Act pursuant to
subparagraph (a) above:
(i) prior to the earliest of (A) termination of
the Letter of Intent or the termination of the Plan
pursuant to the terms thereof, and (B) a Purchase Event
or a Preliminary Purchase Event;
(ii) on more than two occasions;
(iii) more than once during any calendar year;
(iv) within 90 days after the effective date of a
registration referred to in subparagraph (b) above
pursuant to which the holder or holders of the Option
Shares concerned were afforded the opportunity to
register such shares under the 1933 Act and such shares
were registered as requested; and
(v) unless a request therefor is made to Issuer
by the holder or holders of at least 25% or more of the
aggregate number of Option Shares then outstanding.
In addition to the foregoing, Issuer shall not be
required to maintain the effectiveness of any registration
statement after the expiration of 120 days from the effective
date of such registration statement. Issuer shall use all
reasonable efforts to make any filings, and take all steps, under
all applicable state securities laws to the extent necessary to
permit the sale or other disposition of the Option Shares
so registered in accordance with the intended method of distribution
for such shares, provided, however, that Issuer shall not be
required to consent to general jurisdiction or qualify to do
business in any state where it is not otherwise required to so
consent to such jurisdiction or to so qualify to do business.
(d) Expenses. Except where applicable state law
prohibits such payments, Issuer will pay all expenses (including
without limitation registration fees, qualification fees, blue
sky fees and expenses, accounting expenses and printing expenses
incurred by it) in connection with each registration pursuant
to subparagraph (a) or (b) above and all other qualifications,
notifications or exemptions pursuant to subparagraph (a) or (b)
above. Underwriting discounts and commissions relating to Option
Shares, fees and disbursements of counsel to the holders of
Option Shares being registered and any other expenses incurred by
such holders in connection with any such registration shall be
borne by such holders.
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(e) Indemnification. In connection with any
registration under subparagraph (a) or (b) above, Issuer hereby
indemnifies the holder of the Option Shares, and each underwriter
thereof, including each person, if any, who controls such holder
or underwriter within the meaning of Section 15 of the 1933 Act,
against all expenses, losses, claims, damages and liabilities
caused by any untrue, or alleged untrue, statement of a material
fact contained in any registration statement or prospectus or
notification or offering circular (including any amendments or
supplements thereto) or any preliminary prospectus, or caused by
any omission, or alleged omission, to state therein a material
fact required to be stated therein or necessary to make the
statements therein not misleading, except insofar as such
expenses, losses, claims, damages or liabilities of such
indemnified party are caused by any untrue statement or alleged
untrue statement that was included by Issuer in any such
registration statement or prospectus or notification or offering
circular (including any amendments or supplements thereto) in
reliance upon and in conformity with, information furnished in
writing to Issuer by such indemnified party expressly for use
therein, and Issuer and each officer, director and controlling
person of Issuer shall be indemnified by such holder of the
Option Shares, or by such underwriter, as the case may be, for
all such expenses, losses, claims, damages and liabilities caused
by any untrue, or alleged untrue, statement that was included by
Issuer in any such registration statement or prospectus or
notification or offering circular (including any amendments or
supplements thereto) in reliance upon, and in conformity with,
information furnished in writing to Issuer by such holder or
such underwriter, as the case may be, expressly for such use.
Promptly upon receipt by a party indemnified under this
subparagraph (e) of notice of the commencement of any action
against such indemnified party in respect of which indemnity or
reimbursement may be sought against any indemnifying party under
this subparagraph (e), such indemnified party shall notify the
indemnifying party in writing of the commencement of such action,
but, except to the extent of any actual prejudice to the
indemnifying party, the failure so to notify the indemnifying
party shall not relieve it of any liability which it
may otherwise have to any indemnified party under this subparagraph
(e). In case notice of commencement of any such action shall be
given to the indemnifying party as above provided, the
indemnifying party shall be entitled to participate in and, to
the extent it may wish, jointly with any other indemnifying party
similarly notified, to assume the defense of such action at its
own expense, with counsel chosen by it and reasonably
satisfactory to such indemnified party. The indemnified party
shall have the right to employ separate counsel in any such
action and participate in the defense thereof, but the fees and
expenses of such counsel (other than reasonable costs
of investigation) shall be paid by the indemnified party unless (i)
the indemnifying party agrees to pay the same, (ii) the
indemnifying party fails to assume the defense of such action
with counsel reasonably satisfactory to the indemnified party, or
(iii) the indemnified party has been advised by counsel that one
or more legal defenses may be available to the indemnifying party
that may be contrary to the interest of the indemnified party, in
II-11
which case the indemnifying party shall be entitled to assume the
defense of such action notwithstanding its obligation to bear
fees and expenses of such counsel. No indemnifying party shall
be liable for any settlement entered into without its consent,
which consent may not be unreasonably withheld.
If the indemnification provided for in this subparagraph
(e) is unavailable to a party otherwise entitled to be
indemnified in respect of any expenses, losses, claims, damages
or liabilities referred to herein, then the indemnifying party,
in lieu of indemnifying such party otherwise entitled to be
indemnified, shall contribute to the amount paid or payable by
such party to be indemnified as a result of such expenses,
losses, claims, damages or liabilities in such proportion as is
appropriate to reflect the relative benefits received by Issuer,
the selling shareholders and the underwriters from the offering
of the securities and also the relative fault of Issuer, the
selling shareholders and the underwriters in connection with
the statements or omissions which resulted in such expenses, losses,
claims, damages or liabilities, as well as any other relevant
equitable considerations. The amount paid or payable by a party
as a result of the expenses, losses, claims, damages and
liabilities referred to above shall be deemed to include any
legal or other fees or expenses reasonably incurred by such party
in connection with investigating or defending any action or
claim; provided however, that in no case shall the holders of the
Option Shares be responsible, in the aggregate, for any amount in
excess of the net offering proceeds attributable to its Option
Shares included in the offering. No person guilty of
fraudulent misrepresentation (within the meaning of Section 11(f) of the
1933 Act) shall be entitled to contribution from any person who
was not guilty of such fraudulent misrepresentation. Any
obligation by any holder to indemnify shall be several and not
joint with other holders.
In connection with any registration pursuant to
subparagraph (a) or (b) above, Issuer and each holder of any
Option Shares (other than Grantee) shall enter into an agreement
containing the indemnification provisions of this subparagraph
(e).
(f) Miscellaneous Reporting. Issuer shall comply
with all reporting requirements and will do all such other things
as may be necessary to permit the expeditious sale at any time of
any Option Shares by the holder thereof in accordance with and to
the extent permitted by any rule or regulation permitting non-
registered sales of securities promulgated by the SEC from time
to time, including, without limitation, Rule 144A. Issuer shall
at its expense provide the holder of any Option Shares with any
information necessary in connection with the completion and
filing of any reports or forms required to be filed by them under
the 1933 Act or the 1934 Act, or required pursuant to any state
securities laws or the rules of any stock exchange.
(g) Issue Taxes. Issuer will pay all stamp taxes in
connection with the issuance and the sale of the Option Shares
and in connection with the exercise of the Option, and will save
Grantee harmless, without limitation as to time, against any and
II-12
all liabilities, with respect to all such taxes.
10. Quotation; Listing. If Issuer Common Stock or any
other securities to be acquired upon exercise of the Option are
then authorized for quotation or trading or listing on the
NASDAQ/NMS or any securities exchange, Issuer, upon the request
of Grantee, will promptly file an application, if required,
to authorize for quotation or trading or listing the shares of
Issuer Common Stock or other securities to be acquired upon
exercise of the Option on the NASDAQ/NMS or such other securities
exchange and will use its best efforts to obtain approval, if
required, of such quotation or listing as soon as practicable.
11. Division of Option. Upon the occurrence of a
Purchase Event or a Preliminary Purchase Event, this Agreement
(and the Option granted hereby) are exchangeable, without
expense, at the option of Grantee, upon presentation and
surrender of this Agreement at the principal office of Issuer for
other Agreements providing for Options of different denominations
entitling the holder thereof to purchase in the aggregate the
same number of shares of Issuer Common Stock purchasable
hereunder. The terms "Agreement" and "Option" as used herein
include any other Agreements and related Options for which this
Agreement (and the Option granted hereby) may be exchanged. Upon
receipt by Issuer of evidence reasonably satisfactory to it of
the loss, theft, destruction or mutilation of this Agreement, and
(in the case of loss, theft or destruction) of reasonably
satisfactory indemnification, and upon surrender and cancellation
of this Agreement, if mutilated, Issuer will execute and deliver
a new Agreement of like tenor and date. Any such new Agreement
executed and delivered shall constitute an additional contractual
obligation on the part of Issuer, whether or not the Agreement so
lost, stolen, destroyed or mutilated shall at any time be
enforceable by anyone.
12. Miscellaneous.
(a) Expenses. Except as otherwise provided in
Section 9, each of the parties hereto shall bear and pay all
costs and expenses incurred by it or on its behalf in connection
with the transactions contemplated hereunder, including fees and
expenses of its own financial consultants, investment bankers,
accountants and counsel.
(b) Waiver and Amendment. Any provision of this
Agreement may be waived at any time by the party that is entitled
to the benefits of such provision. This Agreement may not be
modified, amended, altered or supplemented except upon the
execution and delivery of a written agreement executed by the
parties hereto.
(c) Entire Agreement: No Third-Party Beneficiary;
Severability. This Agreement, together with the Letter of Intent
and, when executed, the Plan and the other documents and
instruments referred to herein and therein, between Grantee and
Issuer (i) constitutes the entire agreement and supersedes all
prior agreements and understandings, both written and oral,
between the parties with respect to the subject matter hereof,
II-13
and (ii) is not intended to confer upon any person other than the
parties hereto (other than any transferees of the Option Shares
or any permitted transferee of this Agreement pursuant to
Section 13(h)) any rights or remedies hereunder. If any term,
provision, covenant or restriction of this Agreement is held by a
court of competent jurisdiction or a federal or state regulatory
agency to be invalid, void or unenforceable, the remainder of
the terms, provisions, covenants and restrictions of this Agreement
shall remain in full force and effect and shall in no way be
affected, impaired or invalidated. If for any reason such court
or regulatory agency determines that the Option does not permit
Grantee to acquire, or does not require Issuer to repurchase, the
full number of shares of Issuer Common Stock as provided in
Sections 3 and 8 (as adjusted pursuant to Section 7), it is the
express intention of Issuer to allow Grantee to acquire or to
require Issuer to repurchase such lesser number of shares as may
be permissible without any amendment or modification hereof.
(d) Governing Law. This Agreement shall be governed
and construed in accordance with the laws of the Commonwealth of
Virginia without regard to any applicable conflicts of law rules.
(e) Descriptive Heading. The descriptive headings
contained herein are for convenience of reference only and shall
not affect in any way the meaning or interpretation of this
Agreement.
(f) Notices. All notices and other communications
hereunder shall be in writing and shall be deemed given
if delivered personally, telecopied (with confirmation) or mailed by
registered or certified mail (return receipt requested) to the
parties at the following addresses (or at such other address for
a party as shall be specified by like notice):
If to Issuer to: Annapolis Bancorp, Inc.
147 Old Solomons Island Road
Annapolis, Maryland 21401
Attention: Gilbert L. Hardesty
President
with a copy to:Edward L. Lublin, Esq.
Manatt, Phelps & Phillips
1200 New Hampshire Avenue, N.W.
Washington, D.C. 20036
If to Grantee to: Crestar Financial Corporation
P. O. Box 26665
Richmond, Virginia 23261-6665
Attention: John C. Clark, III
Senior Vice President
and General Counsel
with a copy to: Lathan M. Ewers, Jr.
Hunton & Williams
951 East Byrd Street
Richmond, Virginia 23219
(g) Counterparts. This Agreement and any amendments
II-14
hereto may be executed in two counterparts, each of which shall
be considered one and the same agreement and shall become
effective when both counterparts have been signed, it being
understood that both parties need not sign the same counterpart.
(h) Assignment. Neither this Agreement nor any of
the rights, interests or obligations hereunder or under
the Option shall be assigned by any of the parties hereto (whether by
operation of law or otherwise) without the prior written consent
of the other party, except that Grantee may assign this Agreement
to a wholly owned subsidiary of Grantee and Grantee may assign
its rights hereunder in whole or in part after the occurrence of
a Purchase Event; provided, however, that until the date 30 days
following the date on which the appropriate regulatory
authorities approve an application by Grantee to acquire the
Option Shares, Crestar may not assign its rights under the Option
except in (i) a widely dispersed public distribution, (ii) a
private placement in which no one party acquires the right
to purchase in excess of 5% of the voting shares of the Issuer,
(iii) an assignment to a single party for the purpose of
conducting a widely dispersed public distribution on Grantee's
behalf, or (iv) any other manner approved by such regulatory
authorities. Subject to the preceding sentence, this Agreement
shall be binding upon, inure to the benefit and be enforceable by
the parties and their respective successors and assigns.
(i) Further Assurances. In the event of any exercise
of the Option by Grantee, Issuer and Grantee shall execute and
deliver all other documents and instruments and take all
other action that may be reasonably necessary in order to consummate
the transactions provided for by such exercise.
(j) Specific Performance. The parties hereto agree
that this Agreement may be enforced by either party through
specific performance, injunctive relief and other equitable
relief. Both parties further agree to waive any requirement for
the securing or posting of any bond in connection with the
obtaining of any such equitable relief and that this provision is
without prejudice to any other rights that the parties hereto may
have for any failure to perform this Agreement.
II-15
IN WITNESS WHEREOF, Issuer and Grantee have caused this
Stock Option Agreement to be signed by their respective officers
thereunto duly authorized, all as of the day and year first
written above.
ANNAPOLIS BANCORP, INC.
By:/s/ Gilbert L. Hardesty
Name: Gilbert L. Hardesty
Title: Presidenet and Chief
Executive Officer
CRESTAR FINANCIAL CORPORATION
By:/s/ Richard G. Tilghman
Name: Richard G. Tilghman
Title: Chairman and Chief
Executive Officer
II-16
Annex III
__________, 1994
Board of Directors
Annapolis Bancorp, Inc.
147 Old Solomons Island Road
Annapolis, Maryland 21401
Madam and Gentlemen:
Annapolis Bancorp, Inc. ("AB"), Annapolis Federal Savings
Bank, Crestar Financial Corporation ("Crestar") and Crestar Bank
of MD have entered into an Agreement and Plan of Reorganization
and a Plan of Merger (collectively, the "Agreement") pursuant to
which, subject to certain conditions and provisions set forth
therein, AB will be merged with and into Crestar in a transaction
(the "Merger") in which each share of Annapolis Bancorp's Common
Stock ("AB Common Stock") issued and outstanding on the effective
date of the Merger (the "Effective Date") will be canceled and
exchanged for a number of shares (the "Exchange Ratio") of
Crestar Financial Corporation's Common Stock ("Crestar Common
Stock") equal to $12.75 (the "Merger Consideration"). Holders of
AB Common Stock will have the option of exchanging their shares
for cash equal to $12.75 per share, provided that the total
number of dissenting shares and shares exchanged for cash does
not exceed 30 percent of the outstanding shares of AB Common
Stock. As a condition to Crestar's execution of the Agreement
and in consideration thereof, Crestar and AB have entered into a
Stock Option Agreement (the "Option Agreement") pursuant to which
AB has agreed to issue to Crestar, on the terms and conditions
set forth therein, an option to purchase up to 240,000 shares of
AB Common Stock at a price of $10.00 per share (the "Stock Option
Price"). You have requested our opinion as to fairness, from a
financial point of view, of the Merger Consideration and the
Stock Option Price to be received by the shareholders of AB.
For purposes of establishing the Exchange Ratio, subject to
adjustment as provided in the Agreement, the Crestar Common Stock
will be valued at the average closing price of Crestar Common
Stock as reported on the New York Stock Exchange for each of the
20 trading days ending on the third day prior to the Effective
Date. No fractional shares will be issued by Crestar in
connection with the Merger, but, in lieu thereof, any holder of
AB Common Stock who otherwise would be entitled to receive a
fraction of a share of Crestar Common Stock will be paid in cash
on the basis of the price of Crestar Common Stock used to
determine the Exchange Ratio.
Kaplan Associates, Inc. ("KAI") is a financial advisory and
consulting firm that specializes in the commercial banking,
Board of Directors
Annapolis Bancorp, Inc.
________, 1994
Page Two
thrift and mortgage banking industries. As part of our
financial advisory and consulting services, we are regularly engaged in the
independent valuation of securities in connection with initial
public offerings, private placements, merger and acquisition
transactions, and recapitalizations. KAI acted as AB's financial
advisor in connection with the Merger and participated in the
negotiations leading to the Agreement and is, therefore, familiar
with AB.
During the course of our engagement, we reviewed and
analyzed certain internal and publicly available materials
bearing upon the financial and operating condition of AB and
Crestar and materials prepared in connection with the proposed
Merger. In addition, we: (i) reviewed the Agreement and the
Option Agreement; (ii) reviewed the Proxy Statement/Prospectus;
(iii) compared certain financial information for AB and certain
financial and stock market information for Crestar, with similar
information for comparable companies; (iv) evaluated the pro
forma ownership of Crestar Common Stock by AB's shareholders
relative to the proforma contribution of AB's assets,
liabilities, equity and earnings to the pro forma company; (v)
considered the financial terms of certain other business
combinations that have recently been effected; (vi)
conducted discussions with members of the senior management of AB and
Crestar for purposes of reviewing the business and future
prospects of AB and Crestar; and (vii) took into account our
assessment of general economic, market and financial conditions
and experience in other transactions, as well as our knowledge of
the commercial banking and thrift industries and general
experience in securities valuations.
In rendering this opinion, we have assumed, without
independent verification, the accuracy and completeness, in all
material respects, of the financial and other information
and representations provided to us by AB and Crestar. We have not
made an independent evaluation or appraisal of the assets or
liabilities of AB or Crestar, nor have we been furnished with any
such appraisals.
Based upon and subject to the foregoing, we are of the
opinion that, as of the date hereof, the Merger Consideration to
be received by the shareholders of AB as described in the
Agreement and the Stock Option Price as described in the Option
Agreement are fair from a financial point of view.
Sincerely,
KAPLAN ASSOCIATES, INC.
III-2
Annex IV
SECTION 262 - DELAWARE GENERAL CORPORATION LAW
(a) Any stockholder of a corporation of this State who
holds shares of stock on the date of the making of a demand
pursuant to subsection (d) of this section with respect to such
shares, who continuously holds such shares through the effective
date of the merger or consolidation, who has otherwise complied
with subsection (d) of this section and who has neither voted in
favor of the merger or consolidation nor consented thereto in
writing pursuant to
section 228 of this title shall be entitled to an
appraisal by the Court of Chancery of the fair value of his
shares of stock under the circumstances described in subsections
(b) and (c) of this section. As used in this section, the word
"stockholder" means a holder of record of stock in a stock
corporation and also a member of record of a nonstockcorporation; the
words "stock" and "share" mean and include what
is ordinarily meant by those words and also membership or
membership interest of a member of a nonstock corporation.
(b) Appraisal rights shall be available for the shares of
any class or series of stock of a constituent corporation in a
merger or consolidation to be effected pursuant to
section 251, 252,
254, 257, 258 or 263 of this title:
(1) Provided, however, that no appraisal rights under
this section shall be available for the shares of any class
or series of stock which, at the record date fixed to
determine the stockholders entitled to receive notice of and
to vote at the meeting of stockholders to act upon the
agreement of merger or consolidation, were either (i) listed
on a national securities exchange or designated as a
national market system security on an interdealer quotation
system by the National Association of Securities Dealers,
Inc. or (ii) held of record by more than 2,000 stockholders;
and further provided that no appraisal rights shall be
available for any shares of stock of the constituent
corporation surviving a merger if the merger did not require
for its approval the vote of the stockholders of the
surviving corporation as provided in subsection (f) of
section 251
of this title.
(2) Notwithstanding paragraph (1) of this subsection,
appraisal rights under this section shall be available for
the shares of any class or series of stock of a constituent
corporation if the holders thereof are required by the terms
of an agreement of merger or consolidation pursuant to
sections 251, 252, 254, 257, 258 and 263 of this title to accept
for such stock anything except:
a. Shares of stock of the corporation surviving
or resulting from such merger or consolidation;
b. Shares of stock of any other corporation which
at the effective date of the merger or consolidation
will be either listed on a national securities exchange
IV-1
or designated as a national market system security on
an interdealer quotation system by the National
Association of Securities Dealers, Inc. or held of
record by more than 2,000 stockholders;
c. Cash in lieu of fractional shares of the
corporations described in the foregoing subparagraphs
a. and b. of this paragraph; or
d. Any combination of the shares of stock and
cash in lieu of fractional shares described in the
foregoing subparagraphs a., b. and c. of this
paragraph.
(3) In the event all of the stock of a subsidiary
Delaware corporation party to a merger effected under
section 253
of this title is not owned by the parent corporation
immediately prior to the merger, appraisal rights shall
be available for the shares of the subsidiary Delaware
corporation.
(c) Any corporation may provide in its certificate of
incorporation that appraisal rights under this section shall be
available for the shares of any class or series of its stock as a
result of an amendment to its certificate of incorporation, any
merger or consolidation in which the corporation is a constituent
corporation or the sale of all or substantially all of the assets
of the corporation. If the certificate of incorporation contains
such a provision, the procedures of this section, including those
set forth in subsections (d) and (e) of this section, shall apply
as nearly as is practicable.
(d) Appraisal rights shall be perfected as follows:
(1) If a proposed merger or consolidation for which
appraisal rights are provided under this section is to be
submitted for approval at a meeting of stockholders, the
corporation, not less than 20 days prior to the meeting,
shall notify each of its stockholders who was such on the
record date for such meeting with respect to shares for
which appraisal rights are available pursuant to subsection
(b) or (c) hereof that appraisal rights are available for
any or all of the shares of the constituent corporations,
and shall include in such notice a copy of this section.
Each stockholder electing to demand the appraisal of his
shares shall deliver to the corporation, before the taking
of the vote on the merger or consolidation, a written demand
for appraisal of his shares. Such demand will be sufficient
if it reasonably informs the corporation of the identity of
the stockholder and that the stockholder intends thereby to
demand the appraisal of his shares. A proxy or vote against
the merger or consolidation shall not constitute such a
demand. A stockholder electing to take such action must do
so by a separate written demand as herein provided. Within
10 days after the effective date of such merger or
consolidation, the surviving or resulting corporation shall
notify each stockholder of each constituent corporation who
has complied with this subsection and has not voted in favor
IV-2
of or consented to the merger or consolidation of the date
that the merger or consolidation has become effective; or
(2) If the merger or consolidation was approved
pursuant to section 228 or 253 of this title, the surviving or
resulting corporation, either before the effective date of
the merger or consolidation or within 10 days thereafter,
shall notify each of the stockholders entitled to appraisal
rights of the effective date of the merger or consolidation
and that appraisal rights are available for any or all of
the shares of the constituent corporation, and shall include
in such notice a copy of this section. The notice shall be
sent by certified or registered mail, return receipt
requested, addressed to the stockholder at his address as it
appears on the records of the corporation. Any stockholder
entitled to appraisal rights may, within 20 days after the
date of mailing of the notice, demand in writing from the
surviving or resulting corporation the appraisal of his
shares. Such demand will be sufficient if it reasonably
informs the corporation of the identity of the stockholder
and that the stockholder intends thereby to demand the
appraisal of his shares.
(e) Within 120 days after the effective date of the merger
or consolidation, the surviving or resulting corporation or any
stockholder who has complied with subsections (a) and (d) hereof
and who is otherwise entitled to appraisal rights, may file a
petition in the Court of Chancery demanding a determination of
the value of the stock of all such stockholders. Notwithstanding
the foregoing, at any time within 60 days after the effective
date of the merger or consolidation, any stockholder shall have
the right to withdraw his demand for appraisal and to accept the
terms offered upon the merger or consolidation. Within 120 days
after the effective date of the merger or consolidation, any
stockholder who has complied with the requirements of subsections
(a) and (d) hereof, upon written request, shall be entitled to
receive from the corporation surviving the merger or resulting
from the consolidation a statement setting forth the aggregate
number of shares not voted in favor of the merger or
consolidation and with respect to which demands for appraisal
have been received and the aggregate number of holders of such
shares. Such written statement shall be mailed to the
stockholder within 10 days after his written request for such a
statement is received by the surviving or resulting corporation
or within 10 days after expiration of the period for delivery of
demands for appraisal under subsection (d) hereof, whichever is
later.
(f) Upon the filing of any such petition by a stockholder,
service of a copy thereof shall be made upon the surviving or
resulting corporation, which shall within 20 days after such
service file in the office of the Register in Chancery in which
the petition was filed a duly verified list containing the names
and addresses of all stockholders who have demanded payment for
their shares and with whom agreements as to the value of their
shares have not been reached by the surviving or resulting
corporation. If the petition shall be filed by the surviving or
resulting corporation, the petition shall be accompanied by such
IV-3
a duly verified list. The Register in Chancery, if so ordered by
the Court, shall give notice of the time and place fixed for the
hearing of such petition by registered or certified mail to the
surviving or resulting corporation and to the stockholders shown
on the list at the addresses therein stated. Such notice shall
also be given by 1 or more publications at least 1 week before
the day of the hearing, in a newspaper of general circulation
published in the City of Wilmington, Delaware or such publication
as the Court deems advisable. The forms of the notices by mail
and by publication shall be approved by the Court, and the costs
thereof shall be borne by the surviving or resulting corporation.
(g) At the hearing on such petition, the Court shall
determine the stockholders who have complied with this section
and who have become entitled to appraisal rights. The Court may
require the stockholders who have demanded an appraisal for their
shares and who hold stock represented by certificates to submit
their certificates of stock to the Register in Chancery for
notation thereon of the pendency of the appraisal proceedings;
and if any stockholder fails to comply with such direction, the
Court may dismiss the proceedings as to such stockholder.
(h) After determining the stockholders entitled to an
appraisal, the Court shall appraise the shares, determining their
fair value exclusive of any element of value arising from the
accomplishment or expectation of the merger or consolidation,
together with a fair rate of interest, if any, to be paid upon
the amount determined to be the fair value. In determining such
fair value, the Court shall take into account all relevant
factors. In determining the fair rate of interest, the Court may
consider all relevant factors, including the rate of interest
which the surviving or resulting corporation would have had to
pay to borrow money during the pendency of the proceeding. Upon
application by the surviving or resulting corporation or by any
stockholder entitled to participate in the appraisal proceeding,
the Court may, in its discretion, permit discovery or other
pretrial proceedings and may proceed to trial upon the appraisal
prior to the final determination of the stockholder entitled to
an appraisal. Any stockholder whose name appears on the list
filed by the surviving or resulting corporation pursuant to
subsection (f) of this section and who has submitted his
certificates of stock to the Register in Chancery, if such is
required, may participate fully in all proceedings until it is
finally determined that he is not entitled to appraisal rights
under this section.
(i) The Court shall direct the payment of the fair value of
the shares, together with interest, if any, by the surviving or
resulting corporation to the stockholders entitled thereto.
Interest may be simple or compound, as the Court may direct.
Payment shall be so made to each such stockholder, in the case of
holders of uncertificated stock forthwith, and the case of
holders of shares represented by certificates upon the surrender
to the corporation of the certificates representing such stock.
The Court's decree may be enforced as other decrees in the Court
of Chancery may be enforced, whether such surviving or resulting
corporation be a corporation of this State or of any state.
IV-4
(j) The costs of the proceeding may be determined by the
Court and taxed upon the parties as the Court deems equitable in
the circumstances. Upon application of a stockholder, the Court
may order all or a portion of the expenses incurred by any
stockholder in connection with the appraisal proceeding,
including, without limitation, reasonable attorney's fees and the
fees and expenses of experts, to be charged pro rata against the
value of all the shares entitled to an appraisal.
(k) From and after the effective date of the merger or
consolidation, no stockholder who has demanded his appraisal
rights as provided in subsection (d) of this section shall be
entitled to vote such stock for any purpose or to receive payment
of dividends or other distributions on the stock (except
dividends or other distributions payable to stockholders of
record at a date which is prior to the effective date of the
merger or consolidation); provided, however, that if no petition
for an appraisal shall be filed within the time provided in
subsection (e) of this section, or if such stockholder shall
deliver to the surviving or resulting corporation a written
withdrawal of his demand for an appraisal and an acceptance of
the merger or consolidation, either within 60 days after the
effective date of the merger or consolidation as provided in
subsection (e) of this section or thereafter with the written
approval of the corporation, then the right of such stockholder
to an appraisal shall cease. Notwithstanding the foregoing, no
appraisal proceeding in the Court of Chancery shall be dismissed
as to any stockholder without the approval of the Court, and such
approval may be conditioned upon such terms as the Court deemsjust.
(l) The shares of the surviving or resulting corporation to
which the shares of such objecting stockholders would have been
converted had they assented to the merger or consolidation shall
have the status of authorized and unissued shares of the
surviving or resulting corporation. (8 Del. C. 1953, section 262; 56
Del. Laws, c. 50; 56 Del. Laws, c. 186, section 24; 57 Del. Laws, c.
148,
sections 27-29; 59 Del. Laws, c. 106, section 12; 60 Del. Laws, c. 371,
sections 3-12; 63 Del. Laws, c. 25, section 14; 63 Del. Laws, c. 152,
sections 1,
2; 64 Del. Laws, c. 112, sections 46-54; 66 Del. Laws, c. 136,
sections 30-32; 66
Del. Laws, c. 352, section 9; 67 Del. Laws, c. 376, sections 19, 20.)
IV-5
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 20. Indemnification of Officers and Directors
Crestar's Articles of Incorporation implement the provisions
of the VSCA, which provide for the indemnification of Crestar's
directors and officers in a variety of circumstances, which may
include indemnification for liabilities under the Securities Act
of 1933. Under sections 13.1-697 and 13.1-702 of the VSCA, a
Virginia corporation generally is authorized to indemnify its
directors and officers in civil or criminal actions if they acted
in good faith and believed their conduct to be in the best
interests of the corporation and, in the case of criminal ac-
tions, had no reasonable cause to believe that the conduct was
unlawful. Crestar's Articles of Incorporation require indemnifi-
cation of directors and officers with respect to certain liabili-
ties, expenses and other amounts imposed upon them be reason of
having been a director or officer, except in the case of willful
misconduct or a knowing violation of criminal law. Crestar also
carries insurance on behalf of directors, officers, employees or
agents that may cover liabilities under the Securities Act of
1933. In addition, the VSCA and Crestar's Articles of Incorpora-
tion eliminate the liability of a director or officer of Crestar
in a shareholder or derivative proceeding. This elimination of
liability will not apply in the event of willful misconduct or a
knowing violation of the criminal law or any federal or
state securities law. Sections 13.1-692.1 and 13.1-696 to -704 of the
VSCA are hereby incorporated herein by reference.
Item 21. Exhibits and Financial Statement Schedules
(a) Exhibits
2(a) Agreement and Plan of Reorganization dated as of
December 22, 1993, among Crestar, Crestar Bank
MD, AB and Annapolis (attached to the
Proxy Statement/Prospectus as Annex I)
2(b) Stock Option Agreement dated as of November 16,
1993, between Crestar and AB (attached to the
Proxy Statement/Prospectus as Annex II)
5 Opinion of Hunton & Williams with respect to
legality
8 Opinion of Hunton & Williams with respect to tax
consequences of the Transaction
24(a) Consent of KPMG Peat Marwick
24(b) Consent of Deloitte & Touche
24(c) Consent of Kaplan Associates, Inc.
II-1
24(d) Consent of Hunton & Williams (included in Exhibit
5 and Exhibit 8)
25 Power of Attorney (included on page II-5 of the
Registration Statement)
28 Form of Proxy
(b) Financial Statement Schedules -- None
(c) Report, Opinion or Appraisal -- (attached to the
Proxy Statement/Prospectus as Annex III)
Item 22. Undertakings
(a) The undersigned Registrant hereby undertakes as fol-
lows:
1. To file, during any period in which offers or
sales are being made, a post-effective amendment
to this registration statement.
(i) To include any prospectus required by sec-
tion 10(a)(3) of the Securities Act of
1933;
(ii) To reflect in the prospectus any facts or
events arising after the effective date of
the registration statement (or the most
recent post-effective amendment thereof)
which, individually or in the aggregate,
represent a fundamental change in the in-
formation set forth in the registration
statement.
(iii) To include any material information with
respect to the plan of distribution not
previously disclosed in the registration
statement or any material change to
such information in the registration statement.
Provided, however, that paragraphs (a)(1)(-
i) and (a)(1)(ii) do not apply if the reg-
istration statement is on Form S-3 or Form
S-8, and the information required to be
included in a post-effective amendment by
those paragraphs is contained in periodic
reports filed by the registrant pursuant to
Section 13 or Section 15(d) of the Securi-
ties Exchange Act of 1934 that are incorpo-
rated by reference in the registration statement.
2. That, for the purpose of determining any liability
under the Securities Act of 1933, each such post-
effective amendment shall be deemed to be a new
registration statement relating to the securities
II-2
offered therein, and the offering of such securi-
ties at that time shall be deemed to be the ini-
tial bona fide offering thereof.
3. To remove from registration by means of a post-
effective amendment any of the securities being
registered which remain unsold at the termination
of the offering.
4. That prior to any public reoffering of the securi-
ties registered hereunder through the use of a
prospectus which is a part of this registration
statement, by any person or party who is deemed to
be an underwriter within the meaning of Rule 145(-
c), the Registrant undertakes that such reoffering
prospectus will contain the information called for
by the applicable registration form with respect
to reofferings by persons who may be deemed under-
writers, in addition to the information called for
by the other items of the applicable form.
5. That every prospectus (i) that is filed pursuant
to the paragraph immediately preceding, or (ii)
that purports to meet the requirements of Section
10(a)(3) of the Act and is used in connection with
an offering of securities subject to Rule 415,
will be filed as part of an amendment to the reg-
istration statement and will not be used until
such amendment is effective, and that, for the
purposes of determining any liability under the
Securities Act of 1933, each such post-effective
amendment shall be deemed to be a new registration
statement relating to the securities offered ther-
ein, and the offering of such securities at that
time shall be deemed to be the initial bona fide
offering thereof.
6. Insofar as indemnification for liabilities arising
under the Securities Act of 1933 may be permitted
to directors, officers and controlling persons of
the Registrant pursuant to the foregoing provi-
sions, or otherwise, the Registrant has been ad-
vised that in the opinion of the Securities and
Exchange Commission such indemnification is
against public policy as expressed in the Act and
is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities
(other than the payment by the Registrant of ex-
penses incurred or paid by a director, officer or
controlling person of the Registrant in the suc-
cessful defense of any action, suit or proceeding)
is asserted by such director, officer or control-
ling person in connection with the securities
being registered, the Registrant will, unless in
the opinion of its counsel the matter has been
settled by controlling precedent, submit to a
court of appropriate jurisdiction the question
whether such indemnification by it is against
II-3
public policy as expressed in the Act and will be
governed by the final adjudication of such issue.
(b) The undersigned registrant hereby undertakes to respond
to requests for information that is incorporated by reference
into the prospectus pursuant to Items 4, 10(b), 11, or 13 of this
form, within one business day of receipt of such request, and to
send the incorporated documents by first-class mail or other
equally prompt means. This includes information contained in
documents filed subsequent to the effective date of the registra-
tion statement through the date of responding to the request.
(c) The undersigned registrant hereby undertakes to supply
by means of the post-effective amendment all information concern-
ing a transaction, and the company being acquired involved
therein, that was not the subject of and included in the regis-
tration statement when it became effective.
II-4
SIGNATURES
Pursuant to the requirements of the Securities Act of
1933, the registrant has duly caused this registration statement
to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Richmond, State of Virginia, on
February 14, 1994.
CRESTAR FINANCIAL CORPORATION
(Registrant)
By: /s/ John C. Clark, III
John C. Clark, III,
Corporate Senior Vice
President, General Counsel
and Secretary
POWER OF ATTORNEY
Pursuant to the requirements of the Securities Act of
1933, this registration statement has been signed by the follow-
ing persons in the capacities indicated on February 14, 1994.
Each of the directors and/or officers of Crestar Financial
Corporation whose signature appears below hereby appoints John
C. Clark, III, Gordon F. Rainey, Jr. and Lathan M. Ewers, Jr., and
each of them severally, as his attorney-in-fact to sign in his
name and behalf, in any and all capacities stated below and to
file with the Commission, any and all amendments, including post-
effective amendments to this registration statement, making such
changes in the registration statement as appropriate, and gener-
ally to do all such things in their behalf in their capacities as
officers and directors to enable Crestar Financial Corporation to
comply with the provisions of the Securities Act of 1933, and all
requirements of the Securities and Exchange Commission.
Signature Title
/s/ Richard G. Tilghman Chairman of the Board and Chief
Richard G. Tilghman Executive Officer and Director
(Principal Executive Officer)
/s/ James M. Wells, III President and Director
James M. Wells, III
/s/ Patrick D. Giblin Vice Chairman of the Board and Chief
Patrick D. Giblin Financial Officer and Director (Principal
Financial and Accounting
Officer)
Director
Richard M. Bagley
Director
William R. Battle
II-5
/s/ J. Carter Fox Director
J. Carter Fox
/s/ Gene A. James Director
Gene A. James
Director
H. Gordon Leggett, Jr.
Director
Charles R. Longsworth
Director
Patrick J. Maher
/s/ Frank E. McCarthy Director
Frank E. McCarthy
/s/ G. Gilmer Minor, III Director
G. Gilmer Minor, III
/s/ Gordon F. Rainey, Jr. Director
Gordon F. Rainey, Jr.
/s/ Frank S. Royal Director
Frank S. Royal, M.D.
/s/ Eugene P. Trani Director
Eugene P. Trani
/s/ William F. Vosbeck Director
William F. Vosbeck
Director
L. Dudley Walker
Director
Karen Hastie Williams
II-6
EXHIBIT INDEX
Location or Sequentially
Exhibit Description Numbered Pages
2(a) Agreement and Plan of Filed herewith on se-
Reorganization quential page no. ___ as
Annex I.
2(b) Stock Option Agreement Filed herewith on seq-
uential page no. ___ as
Annex II.
5 Opinion of Hunton & Filed herewith on seq-
Williams with respect uential page no. ___
to legality
8 Opinion of Hunton & Filed herewith on seq-
Williams with respect uential page no. ___
to tax consequences
24(a) Consent of KPMG Peat Filed herewith on seq-
Marwick uential page no. ___
24(b) Consent of Deloitte & Filed herewith on se-
Touche quential page no. ___
24(c) Consent of Kaplan Asso- Filed herewith on sequ-
ciates, Inc. ential page no. ___
25 Power of Attorney Included on page II-5 of
the Registration Sta-
tement.
28 Form of Proxy Filed herewith on se-
quential page no. ___
Exhibit 5
Hunton & Williams
Riverfront Plaza, East Tower
951 East Byrd Street
Richmond, Virginia 23219-4074
Phone: (804) 788-8200
Telecopy: (804) 788-8218
FILE NO.: 33411.001111
February 15, 1994
Board of Directors
Crestar Financial Corporation
919 East Main Street
Richmond, Virginia 23219
Registration Statement on Form S-4
Ladies and Gentlemen:
We are acting as counsel for Crestar Financial Corporation
(the "Company") in connection with the registration under the
Securities Act of 1933 of 500,000 shares of its Common Stock (the
"Common Stock"). The transaction in which the Common Stock will
be issued is described in the Company's Registration Statement on
Form S-4 of the Company (the "Registration Statement") filed with
the Securities and Exchange Commission (the "Commission") on
February 15, 1994. In connection with the filing of the
Registration Statement you have requested our opinion concerning
certain corporate matters.
We are of the opinion that:
1. The Company is a corporation duly incorporated, validly
existing and in good standing under the laws of the Commonwealth
of Virginia.
2. The Common Stock has been duly authorized and, when the
shares have been issued as described in the Registration
Statement, will be legally issued, fully paid and nonassessable.
We consent to the filing of this opinion with the Commission
as an exhibit to the Registration Statement and to the references
to us in the Proxy Statement/Prospectus included therein. In
giving this consent, we do not admit that we are within the
category of persons whose consent is required by section 7 of the
Securities Act of 1933 or the rules and regulations promulgated
thereunder by the Securities and Exchange Commission.
Very truly yours,
Exhibit 8
Hunton & Williams
Riverfront Plaza, East Tower
951 East Byrd Street
Richmond, Virginia 23219-4074
Phone: (804) 788-8200
Telecopy: (804) 788-8218
FILE NO.: 33411.001111
February 14, 1994
Crestar Financial Corporation
Crestar Bank MD
919 East Main Street
Richmond, Virginia 23219
Annapolis Bancorp, Inc.
Annapolis Federal Savings Bank
147 Old Solomons Island Road
Annapolis, Maryland 21401
Merger of Annapolis Bancorp, Inc.
And Crestar Financial Corporation
Certain Federal Income Tax Matters
Gentlemen:
We have acted as counsel to Crestar Financial
Corporation ("Crestar") in connection with the proposed merger of
Annapolis Bancorp, Inc. ("AB") into Crestar (the "Holding Company
Merger"). Shortly after the Holding Company Merger, Annapolis
Federal Savings Bank ("Annapolis"), currently a wholly-owned
subsidiary of AB, is to be merged directly or indirectly into
Crestar Bank MD ("Crestar Bank"), a wholly-owned subsidiary of
Crestar.
In the Holding Company Merger, each outstanding share of
AB common stock (other than shares held by dissenting share-holders or
Crestar) is to be converted into a fraction of a share
of Crestar common stock having a fair market value of $12.75 or,
at the election of each AB shareholder, $12.75 in cash. For that
purpose, Crestar common stock will be valued at the average of
the closing price for Crestar common stock for the 20 trading
days ending on the third day before the closing date for the
Holding Company Merger. Any AB shareholder who becomes entitled
to a fractional share interest in Crestar common stock will
receive cash from Crestar in lieu of the fractional share
interest. Any AB shareholder exercising dissenter's rights will
have the right to receive cash for his shares of AB common stock.
Crestar Financial Corporation
Annapolis Bancorp, Inc.
February 14, 1994
Page 2
The total number of shares of AB common stock that may
be exchanged for cash pursuant to either the cash election or the
exercise of dissenter's rights is limited to 30 percent of the
shares outstanding immediately before the Holding Company Merger.
If the total number of shares of AB common stock for which cash
elections are made or dissenter's rights are exercised exceeds 30
percent of the shares of AB common stock outstanding immediately
before the Holding Company Merger, Crestar will not pay cash for
all the shares for which cash elections are made. Instead,
Crestar first will pay cash to each holder of 100 or fewer shares
of AB stock (if such shareholder has submitted all his shares for
cash) and then will pay cash and issue shares of Crestar common
stock pro rata for the remaining shares submitted for cash.
Shortly after the Holding Company Merger, Annapolis is
to be merged directly or indirectly into Crestar Bank (the "Bank
Merger"). Maryland banking statutes currently prohibit a savings
and loan association, such as Annapolis, from directly merging
into a Maryland bank, such as Crestar Bank. Legislation
currently pending before the Maryland legislature would amend the
preceding statutes to allow the direct merger of a savings and
loan association into a Maryland bank. If such legislation is
enacted into law and becomes effective before the closing date of
the Holding Company Merger, then Crestar may elect to merge
Annapolis directly into Crestar Bank. If the Maryland banking
statutes are not amended before the Holding Company Merger to
permit a direct merger of Annapolis into Crestar Bank, then the
Bank Merger is to be accomplished indirectly via the following
steps: (i) Crestar will form a Maryland-chartered savings and
loan association, which will be a wholly-owned subsidiary of
Crestar (the "Interim Thrift"), (ii) Annapolis will merge into
the Interim Thrift, (iii) the Interim Thrift will convert into a
Maryland-chartered commercial bank (the "Interim Bank"), and (iv)
immediately after that conversion, the Interim Bank will merge
into Crestar Bank. The Bank Merger is to qualify as an "Oakar"
transaction in accordance with section 5(d)(3)(A) of the
Federal Deposit Insurance Act.
You have requested our opinion concerning certain
federal income tax consequences of the Holding Company Merger and
the Bank Merger. In giving this opinion, we have reviewed the
Agreement and Plan of Reorganization dated as of December 22,
1993, among Crestar, Crestar Bank, AB, and Annapolis; the Plan of
Merger relating to the Holding Company Merger; the Thrift
Agreegment of Merger relating to the merger of Annapolis into the
Interim Thrift; the Plan of Conversion relating to the conversion
of the Interim Thrift into the Interim Bank; the Bank Agreement
of Merger relating to the merger of Interim Bank into Crestar
Bank; the alternative Bank Agreement of Merger relating to the
direct merger of Annapolis into Crestar Bank; the Form S-4
Registration Statement under the Securities Act of 1933 relating
Crestar Financial Corporation
Annapolis Bancorp, Inc.
February 14, 1994
Page 3
to the Holding Company Merger (the "S-4"); and such other
documents as we have considered necessary. In addition, we have
assumed the following:
1. The fair market value of the Crestar common stock
(including any fractional share interest) received by an AB
shareholder in exchange for AB common stock will be approximately
equal to the fair market value of the AB common stock surrendered
in the exchange.
2. None of the compensation received by any share-
holder-employee of AB will be separate consideration for, or
allocable to, any shares of AB common stock; none of the shares
of Crestar common stock received by any shareholder-employee in
the Holding Company Merger will be separate consideration for, or
allocable to, any employment agreement; and the compensation paid
to any shareholder-employee will be for services actually ren-
dered and will be commensurate with amounts paid to third parties
bargaining at arm's length for similar services.
3. The payment of cash in lieu of fractional shares of
Crestar common stock is solely for the purpose of avoiding the
expense and inconvenience to Crestar of issuing fractional shares
and does not represent separately bargained-for consideration.
The total cash consideration that will be paid in the Holding
Company Merger to AB shareholders in lieu of fractional shares of
Crestar common stock will not exceed one percent of the total
consideration that will be issued in the Holding Company Merger
to the AB shareholders in exchange for their AB common stock.
4. No share of AB common stock has been or will be
redeemed in anticipation of the Holding Company Merger, and AB
has not made and will not make any extraordinary distribution
with respect to its stock in anticipation of the Holding Company
Merger.
5. Crestar has no plan or intention to reacquire any of
its stock issued in the Holding Company Merger or to make any
extraordinary distribution with respect to such stock.
6. There is no plan or intention by shareholders of AB
to sell, exchange, or otherwise dispose of a number of shares of
Crestar common stock received in the Holding Company Merger that
would reduce the AB shareholders' ownership of Crestar common
stock to a number of shares having a fair market value, as of the
effective date of the Holding Company Merger, of less than 50
percent of the fair market value of all the formerly outstanding
AB common stock as of that same date. For this purpose, shares
of AB common stock exchanged for cash in the Holding Company
Merger or exchanged for cash in lieu of fractional shares of
Crestar common stock are treated as outstanding AB common stock
Crestar Financial Corporation
Annapolis Bancorp, Inc.
February 14, 1994
Page 4
on the effective date of the Holding Company Merger. Moreover,
shares of AB common stock and shares of Crestar common stock held
by AB shareholders and otherwise sold, redeemed, or disposed of
before or after the Holding Company Merger are considered in
making the above determination.
7. Following the Holding Company Merger, Crestar will
continue the historic business of AB or use a significant portion
of AB's historic business assets in a business.
8. The liabilities of AB that will be assumed by
Crestar and the liabilities, if any, to which the transferred
assets of AB are subject were incurred by AB in the ordinary
course of business.
9. There is no intercorporate indebtedness existing
between AB and Crestar that was issued or acquired or will be
settled at a discount.
10. Neither Crestar nor any subsidiary of Crestar (i)
has transferred or will transfer cash or other property to AB or
any subsidiary of AB for less than fair market value
consideration in anticipation of the Holding Company Merger or
the Bank Merger or (ii) has made or will make any loan to AB or
any subsidiary of AB in anticipation of the Holding Company
Merger or the Bank Merger, except for the loan that may be made
pursuant to Section 8.1 of the Agreement and Plan of
Reorganization, the proceeds of which must be used solely to
repay indebtedness of AB to First National Bank of Maryland.
11. On the effective date of the Holding Company
Merger, the fair market value of the assets of AB transferred to
Crestar will exceed the sum of AB's liabilities assumed by
Crestar plus the amount of liabilities, if any, to which the
transferred assets are subject.
12. Crestar has no plan or intention to sell or other-
wise dispose of any of the assets of AB acquired in the Holding
Company Merger, except in the Bank Merger.
13. Crestar, Crestar Bank, AB, Annapolis, and the share-
holders of AB will pay their respective expenses, if any,
incurred in connection with the Holding Company Merger and the
Bank Merger.
14. For each of Crestar, Crestar Bank, AB, and Annapo-
lis, not more than 25 percent of the fair market value of its
adjusted total assets consists of stock and securities of any one
issuer, and not more than 50 percent of the fair market value of
its adjusted total assets consists of stock and securities of
five or fewer issuers. For purposes of the preceding sentence,
Crestar Financial Corporation
Annapolis Bancorp, Inc.
February 14, 1994
Page 5
(a) a corporation's adjusted total assets exclude cash, cash
items (including accounts receivable and cash equivalents), and
United States government securities, (b) a corporation's adjusted
total assets exclude stock and securities issued by any subsid-
iary at least 50 percent of the voting power or 50 percent of the
total fair market value of the stock of which is owned by the
corporation, but the corporation is treated as owning directly a
ratable share (based on the percentage of the fair market value
of the subsidiary's stock owned by the corporation) of the assets
owned by any such subsidiary, and (c) all corporations that are
members of the same "controlled group" within the meaning of
section 1563(a) of the Internal Revenue Code (the "Code") are
treated as a single issuer.
15. At all times during the five-year period ending on
the effective date of the Holding Company Merger, the fair market
value of all of AB's United States real property interests has
been less than 50 percent of the total fair market value of (i)
its United States real property interests, (ii) its interests in
real property located outside the United States, and (iii) its
other assets used or held for use in a trade or business. For
purposes of the preceding sentence, (i) United States real
property interests include all interests (other than an interest
solely as a creditor) in real property and associated personal
property (such as movable walls and furnishings) located in the
United States or the Virgin Islands and interests in any corpora-
tion (other than a controlled corporation) owning any United
States real property interest, (ii) AB is treated as owning its
proportionate share (based on the relative fair market value of
its ownership interest to all ownership interests) of the assets
owned by any controlled corporation or any partnership, trust, or
estate in which AB is a partner or beneficiary, and (iii) any
such entity in turn is treated as owning its proportionate share
of the assets owned by any controlled corporation or any partner-
ship, trust, or estate in which the entity is a partner or
beneficiary. As used in this paragraph, "controlled corporation
"means any corporation at least 50 percent of the fair market
value of the stock of which is owned by AB, in the case of a
first-tier subsidiary of AB, or by a controlled corporation, in
the case of a lower-tier subsidiary.
16. Any shares of Crestar common stock received in
exchange for shares of AB common stock that (i) were acquired in
connection with the performance of services, including stock
acquired through the exercise of an option or warrant acquired in
connection with the performance of services, and (ii) are subject
to a substantial risk of forfeiture within the meaning of section
83(c) of the Code will be subject to substantially the same risk
of forfeiture after the Holding Company Merger.
17. No outstanding AB common stock acquired in connec-
Crestar Financial Corporation
Annapolis Bancorp, Inc.
February 14, 1994
Page 6
tion with the performance of services was or will have been
acquired within six months before the effective date of the
Holding Company Merger by any person subject to section 16(b) of
the Securities Exchange Act of 1934 other than pursuant to an
option granted more than six months before the effective date of
the Holding Company Merger.
18. Neither AB nor Annapolis has filed, and neither
holds any asset subject to, a consent pursuant to section 341(f)
of the Code and regulations thereunder.
19. Neither AB nor Annapolis is a party to, and neither
holds any asset subject to, a "safe harbor lease" under former
section 168(f)(8) of the Code and regulations thereunder.
20. No share of Annapolis stock has been or will be
redeemed in anticipation of the Bank Merger, and Annapolis has
not made and will not make any extraordinary distribution with
respect to its stock in anticipation of the Bank Merger.
21. Crestar Bank has no plan or intention to reacquire
any of its outstanding stock or to make any extraordinary distri-
bution with respect to such stock.
22. Following the Bank Merger, Crestar Bank will
continue the historic business of Annapolis or use a significant
portion of Annapolis' historic business assets in a business.
23. The liabilities of Annapolis that will be assumed by
Crestar Bank and the liabilities, if any, to which the trans-
ferred assets of Annapolis are subject were incurred by Annapolis
in the ordinary course of business.
24. There is no intercorporate indebtedness existing
between Annapolis and Crestar Bank that was issued or acquired or
will be settled at a discount.
25. On the effective date of the Bank Merger, the
adjusted federal income tax basis and the fair market value of
the assets of Annapolis transferred to Crestar Bank each will
exceed the sum of Annapolis' liabilities assumed by Crestar Bank
plus the amount of liabilities, if any, to which the transferred
assets are subject.
26. Crestar Bank has no plan or intention to sell or
otherwise dispose of any of the assets of Annapolis acquired in
the Bank Merger, except for dispositions made in the ordinary
course of business.
On the basis of the foregoing, and assuming that
(i) with respect to shareholders that are nonresident aliens or
Crestar Financial Corporation
Annapolis Bancorp, Inc.
February 14, 1994
Page 7
foreign entities, AB will comply with all applicable statement
and notification requirements of Treasury Regulation
section 1.897-2(g)
& (h), (ii) the Holding Company Merger will be consummated
in accordance with the Plan of Holding Company Merger, and (iii) the
Bank Merger will be consummated in accordance with either (a) the
Bank Agreement of Merger relating to the direct merger of
Annapolis into Crestar Bank or (b) the Thrift Agreement of
Merger, the Plan of Conversion, and the Bank Agreement of Merger
relating to the indirect merger of Annapolis into Crestar Bank,
we are of the opinion that for federal income tax purposes:
1. The Holding Company Merger will be a reorganization
within the meaning of section 368(a)(1)(A) of the Code.
2. AB will not recognize gain or loss (i) on the
transfer of its assets to Crestar in exchange for Crestar common
stock, cash, and the assumption of AB's liabilities, or (ii) on
the constructive distribution of Crestar common stock and cash to
AB shareholders.
3. Crestar will not recognize gain or loss on the
acquisition of AB's assets in exchange for Crestar common stock,
cash, and the assumption of AB's liabilities.
4. An AB shareholder will not recognize gain or loss on
the exchange of his shares of AB common stock solely for shares
of Crestar common stock (including any fractional share interest)
in the Holding Company Merger.
5. The basis of shares of Crestar common stock
(including any fractional share interest) received in the Holding
Company Merger by an AB shareholder who exchanges his shares of
AB common stock solely for shares of Crestar common stock will be
the same as the basis of the shares of AB common stock exchanged
therefor.
6. An AB shareholder who exchanges shares of AB common
stock for both shares of Crestar common stock (includ-ing any
fractional share interest) and cash (excluding cash received in
lieu of a fractional share) will recognize any gain realized up
to the amount of such cash received, but will not recognize any
loss.
7. The basis of shares of Crestar common stock
(including any fractional share interest) received in the Holding
Company Merger by an AB shareholder who exchanges shares of AB
common stock for shares of Crestar common stock and cash (exclud-
ing cash received in lieu of a fractional share) will be the same
as the basis of the shares of AB common stock exchanged therefor,
decreased by the amount of such cash received and increased by
the amount of gain recognized by the shareholder.
Crestar Financial Corporation
Annapolis Bancorp, Inc.
February 14, 1994
Page 8
8. The holding period for shares of Crestar common
stock (including any fractional share interest) received by an AB
shareholder in the Holding Company Merger will include the
holding period for the shares of AB common stock exchanged
therefor, if such shares of AB common stock are held as a capital
asset on the effective date of the Holding Company Merger.
9. Cash received by an AB shareholder in lieu of a
fractional share of Crestar common stock will be treated as
having been received as full payment in exchange for such frac-
tional share pursuant to section 302(a) of the Code.
10. The Bank Merger will be a reorganization within the
meaning of section 368(a)(1)(D) of the Code and, if Annapolis
merges directly into Crestar Bank, section 368(a)(1)(A) of the
Code. If Annapolis is merged indirectly into Crestar Bank, each
of the Interim Thrift, the Interim Bank, the merger of Annapolis
into the Interim Thrift, and the conversion of the Interim Thrift
to the Interim Bank will be disregarded for federal income tax
purposes, and Annapolis will be treated as transferring its
assets directly to Crestar Bank.
11. Annapolis will not recognize gain or loss (i) on the
transfer of its assets to Crestar Bank in exchange for the
assumption of liabilities and in constructive exchange for
Crestar Bank stock or (ii) on the constructive distribution of
Crestar Bank stock to Crestar. (We note, however, that Annapolis
or Crestar Bank may be required to include in income certain
amounts as a result of (i) the termination of any bad-debt
reserve maintained by Annapolis for federal income tax purposes
and (ii) other possible required changes in accounting methods.)
12. Crestar Bank will not recognize gain or loss
on the acquisition of Annapolis' assets in exchange for the
assumption of Annapolis' liabilities and in constructive exchange
for Crestar Bank stock. (We note, however, that Annapolis or
Crestar Bank may be required to include in income certain amounts
as a result of (i) the termination of any bad-debt reserve
maintained by Annapolis for federal income tax purposes and (ii)
other possible required changes in accounting methods.)
13. Crestar will not recognize gain or loss on the
constructive exchange of shares of Annapolis stock for shares of
Crestar Bank stock in the Bank Merger.
14. The basis of the shares of Crestar Bank stock held
by Crestar will be increased by the basis of the shares of
Annapolis stock outstanding at the time of the Bank Merger.
We are also of the opinion that the material federal
income tax consequences of the Holding Company Merger and the
Crestar Financial Corporation
Annapolis Bancorp, Inc.
February 14, 1994
Page 9
Bank Merger are fairly summarized in the S-4 under the headings
"Summary--Federal Income Tax Consequences of the Transaction" and
"The Holding Company Merger--Certain Federal Income Tax
Consequences." We consent to the use of this opinion as an
exhibit to the S-4 and to the reference to this firm under such
headings. In giving this consent, we do not admit that we are
within the category of persons whose consent is required by
section 7 of the Securities Act of 1933 or the rules and
regulations promulgated thereunder by the Securities and Exchange
Commission.
Very truly yours,
Exhibit 24(a)
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
Crestar Financial Corporation:
We consent to the use of our report included in Crestar
Financial Corporation's Annual Report on Form 10-K for the year
ended December 31, 1992 incorporated herein by reference and to
the reference to our firm under the heading "Experts" in the
Proxy Statement/Prospectus.
Richmond, Virginia
February 14, 1994
Exhibit 24(b)
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Registration Statement of
Crestar Financial Corporation on Form S-4 of our report dated
November 16, 1993 (relating to the consolidated financial
statements of Annapolis Bancorp, Inc. and Subsidiary) appearing
in the Proxy Statement/Prospectus, which is part of this
Registration Statement, and to the reference to us under the
heading "experts" in the Proxy Statement/Prospectus.
DELOITTE & TOUCHE
Washington, D.C.
February 11, 1994
Exhibit 24(c)
February 14, 1994
Annapolis Bancorp, Inc.
147 Old Solomons Island RoadAnnapolis, Maryland 21401
Re: Consent of Kaplan Associates, Inc.
Madam and Gentlemen:
We hereby consent to the filing of our opinion as an appendix
to the Proxy Statement - Prospectus included in this Registration
Statement on Form S-4 and to all references to Kaplan Associates,
Inc. contained herein.
Very truly yours,
KAPLAN ASSOCIATES, INC.
By:
Linda Farrell
Director
Exhibit 28
Revocable Proxy
ANNAPOLIS BANCORP, INC.
147 Old Solomons Island Road
Annapolis, Maryland 21401
Proxy for Special Meeting of Shareholders on , 1994
Solicited on Behalf of the Board of Directors
The undersigned shareholder of Annapolis Bancorp, Inc. ("AB") hereby
appoints the Board of Directors of AB, with full power of substitution, as
proxies, attorneys-in-fact and agents for the undersigned, to vote all the
shares of
the common stock of AB which the undersigned would be entitled to vote if
personally present and acting at the Special Meeting of Shareholders of AB to
be held at Annapolis, Maryland on , 1994
at o'clock, p.m., and at any adjournment or adjournments thereof (the
"Special Meeting") as follows:
The Board of Directors recommends a vote FOR the following proposal:
1. APPROVAL OF AGREEMENT: Approval of the Agreement and Plan of Reorganization
between AB, Annapolis Federal Savings Bank, Crestar Financial Corporation
("Crestar") and Crestar Bank MD, dated December 22, 1993, and a
related Plan
of Merger (collectively, the "Agreement"), pursuant to which (a) AB
will merge with and into Crestar, (b) simultaneously therewith and as a result
thereof, all of the issued and outstanding common stock of AB will be converted
into and
exchanged for shares of common stock of Crestar at the Exchange Ratio (as
defined in the Agreement) or, upon election, cash in the amount of $12.75 per
share of AB common stock, subject to certain limitations.
FOR AGAINST ABSTAIN
(Continued and to be signed on the reverse side)
(continued from other side)
2. Proxyholders are authorized to vote upon such other matters as may properly
come before the Special Meeting. Management is not aware of any other matter
that may come before the Special Meeting.
By signing this proxy, the undersigned acknowledges receipt of the Notice of
Special Meeting of Shareholders, dated , 1994, and the accompanying Proxy
Statement/Prospectus of AB and Crestar.
This proxy when properly executed will be voted as directors herein by the
undersigned shareholder. If no direction is given, this proxy will be voted FOR
the Agreement and the merger of AB with and into Crestar and AB as provided
therein. This
proxy will not prevent you from voting in person if you attend the Special
Meeting. You may also revoke your proxy by delivering a written instrument or a
duly executed proxy bearing a later date to the Secretary of AB at any time
prior to the Special Meeting.
Dated: , 1994
Signature
Signature (if held jointly)
Please sign exactly as name appears hereon, date and return in the enclosed
envelope. Joint owners should each sign personally. Corporation proxies should
be signed by an authorized officer. Partnership proxies should be signed by an
authorized partner. Executors, administrators, trustees, etc., should so
indicate when signing.
PLEASE MARK, SIGN, DATE AND PROMPTLY RETURN THIS PROXY USING THE ENCLOSED
ENVELOPE
